To date only gas-atomised tool steel powders have been used for direct laser additive manufacturing and the potential benefits of using water-atomised powders have not been explored. As the use of the process in the rapid tooling field is growing, there is a need to explore if the less expensive water-atomised materials can be realistically utilised. A comparative investigation is described, using gas- and water-atomised H13 powder deposited with a CO2 laser and coaxial powder feed nozzle. Multiple layer wall dimensions, composition, microstructure, surface finish and hardness are related to process conditions and the causes of the observed phenomena are discussed. An energy-balance method is used to model the temperature of the powders and the results used to explain some of the effects. Results indicate that using the lower cost water-atomised powder still allows a metallurgically sound component to be built and does not significantly affect surface finish. The build rate is, however, lower and the water-atomised powder tends to produce slightly softer walls, attributable to a higher temperature during tempering of deposited material by subsequent laser passes.