The effect of wood-derived charcoal flour on the water resistance and mechanical properties of wood plastic composite (WPC) panels was investigated. The hot press molded WPC panels were produced from polypropylene (37 wt%) with maleic anhydride-grafted polypropylene (MAPP, 3 wt%) and different mixtures of wood flour and charcoal flour. The amount of charcoal flour was gradually increased up to 60 wt%. The thickness swelling and water absorption of WPC panels considerably decreased with increasing charcoal flour content. The internal bond strength and bending properties of the WPC panels significantly improved with increasing charcoal flour content. This was mainly attributed to the high amount of pores and gaps in the charcoal flour. Melted polypropylene could get into the pores and gaps during the hot press molding, which lead to a better interfacial adhesion between polymer matrix and wood filler. The results showed that the charcoal flour could be partially substituted for the wood flour in the production of WPC panels having higher dimensional stability and internal bond strength.