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We present a magnetic bond-order potential (BOP) that is able to provide a correct description of both directional covalent bonds and magnetic interactions in iron. This potential, based on the tight binding approximation and the Stoner model of itinerant magnetism, forms a direct bridge between the electronic-structure and the atomistic modeling hierarchies. Even though BOP calculations are computationally more demanding than those using common empirical potentials, the formalism can be used for studies of complex defect configurations in large atomic ensembles exceeding 10(5) atoms. Our studies of dislocations in alpha-Fe demonstrate that correct descriptions of directional covalent bonds and magnetism are crucial for a reliable modeling of these defects.