In a lot of folklore, iron wards away elves. This could be implemented in the game in several ways:

• Elves take extra damage when hit by iron. Not as much as silver, but still appreciable.
• Elven players take a small amount of damage when putting on or wielding iron gear, but get no further penalty. (dnethack hurts their regeneration rate while wearing iron, which is another option).
• Possibly some detrimental effect when wielding iron weapons as well, a to-hit or damage penalty, or negating bonuses from dexterity, strength, and skill, or something.
• This is balanced by elven racial equipment being better (not improved; it’s already better).