Thin films of silver containing 0.3-1.5% Fe have been prepared by vapor codeposition. Depending on substrate temperature and iron concentration, we could systematically follow the formation of nanometer-size clusters of iron from initially dilute iron monomers. Samples were characterized via x-ray diffraction, resistivity, magnetization, susceptibility, and Mössbauer spectroscopic measurements. For samples with iron concentrations below 1% prepared at low temperatures, we find clear evidence for the Kondo effect. For higher concentrations, all studied samples reveal a nonmonotonic variation of resistivity with temperature, which can be understood by competing shielding of the cluster moments by conduction electron-spin scattering due to the Kondo effect and the magnetic coupling. The magnetic behavior can be best described with an ensemble of ferromagnetic particles. The magnetic freezing observed at low temperatures is assumed to be mainly controlled via the interparticle interactions mediated via conduction electron polarization, i.e., a Ruderman-Kittel-Kasuya-Yosida interaction. © 2011 American Physical Society.