Multiple layer laser powder deposition has recently been applied to producing fully dense 3-D metallic engineering parts for rapid prototyping and tooling. To date, however, the process has been limited to using only gas-atomised, spherical powders. In this paper, the feasibility of using water-atomised powders is investigated, based on an experimental comparison of gas- and water-atomised powders in multiple layer, laser fused deposition of 316L stainless steel. The work shows that, despite much lower cost (approximately 25% of the price of gas-atomised powders), the water-atomised, irregular powders have superior deposition quality in terms of surface finish, deposition uniformity, microstructures and bonding between layers, compared to the gas-atomised powders under the same processing conditions, although deposition rate is lower. Powder geometry and oxygen content differences of the two powders have been found to be the principal reasons for the observed effects. Theoretical analyses of the beam-material interaction processes and melt pool behaviour are presented to explain the observed phenomena. The results indicate that there are both functional and economic reasons for using water-atomised powders for this additive manufacturing application.