Sludge from water treatment plant is a by-product of water treatment and an important solid waste. The influence of mechanically activated water treatment plant sludge ultrafine powder (WTSP) on mechanical properties, microstructure of recycled concrete (RC) was studied. The results show that the incorporation of WTSP reduces the mechanical properties of RC at early age, but makes positive improvement at the later stage. The compressive strength and elastic modulus of the sample containing 20% (mass fraction, the same below) WTSP at 60 d are 13% and 9% higher than those of the reference group, respectively. The number of harmful pores (>100 nm) in the sample reduces by 37.5% and 54.6%, respectively, and the microstructure improves significantly after addition of 10% and 20% WTSP into RC. Nano-indentation analysis shows that the width of interfacial transition zone (ITZ) in RC sample with 20% WTSP added decreases by 20% to 25%, and the elastic modulus of ITZ and new mortar increases. This may be related to the nucleation, the micro-aggregate filling and the pozzolanic effect of WTSP.