Abstract: This study explores the high-value utilization of steel slag, a metallurgical solid waste, to improve the overall performance of wood–plastic composites (WPCs). Steel slag derived from carbon steel smelting was processed into steel slag ultrafine powder using a vertical milling process with a custom grinding aid. The powder was subsequently modified with a silane coupling agent to obtain 800-mesh modified steel slag ultrafine powder (MSSP). The prepared MSSP was used to partially substitute talc powder in WPC formulations produced by melt blending, cold pressing, and hot pressing. The effects of MSSP on the mechanical properties and flame retardancy of the composites were systematically investigated using Fourier-transform infrared spectroscopy, thermogravimetric analysis, X-ray diffraction, differential scanning calorimetry, and scanning electron microscopy. At an MSSP-to-talc weight ratio of 1∶1, the compatibility between components was optimized, yielding strong interfacial interactions between the wood powder and polyethylene and the formation of a polyethylene-encapsulated talc powder structure. This maximized the mechanical properties and flame retardancy of the WPCs. Compared with a pure talc/WPC formulation (MSSP/talc = 0∶1), the tensile, flexural, and impact strengths increased by 55.5%, 36.3%, and 76.7%, respectively. However, increasing the MSSP content further (MSSP/talc > 1∶1) led to particle agglomeration, resulting in an uneven internal stress distribution and reduced mechanical properties. The 1∶1 MSSP/talc WPC exhibited remarkable flame retardancy, with a significantly lower horizontal burning rate, shorter vertical afterflame and afterglow times, and an oxygen index of 22.6%. The enthalpies of melting and crystallization (48.32 and 45.91 J·g⁻¹, respectively) were higher than those of other formulations, indicating improved thermal stability. Mechanistic analysis revealed that the steel slag, which formed during high-temperature smelting, comprised crystalline silicate minerals and glassy phases, contributing to multi-scale reinforcement with a stable skeletal structure within the composite. Meanwhile, the laminated structure of the talc powder enhanced the thermal stability of the matrix. Surface modification with the silane coupling agent improved the interfacial compatibility between MSSP and the polymer matrix. MSSP was uniformly distributed and chemically grafted onto the polymer and wood powder molecular chains, thereby strengthening its interfacial interactions with the matrix. The high hardness and melting point of the mineral phases in MSSP promoted efficient stress transfer, leading to excellent mechanical properties. During combustion, the polyethylene and wood powder residues rapidly coalesced to form a dense and stable char layer that protected the underlying composite, thereby reducing the flammability. Thus, MSSP imparts a dual-functional mechanical reinforcement/flame retardancy effect. This study provides a new strategy for the high-value utilization of steel slag and supports resource recycling and sustainable development.