To mitigate the environmental impact of heavy metal sludge and enhance its resource utilization, it undergoes pre-treatment involving high-temperature sintering and fine grinding into powder (GP). Recognizing the strengths and water resistance of modified magnesium oxysulfate (MMOS) cementitious materials, this research employs them for GP resource utilization. This study explores the effects of GP on the properties and microstructures of MMOS cementitious materials and investigates the underlying mechanisms using a multi-scale microscopic testing method. Results indicated that with an increase in GP content, the fluidity of the material initially declined before improving due to GP's morphological and filling properties. GP weakened the mechanical properties of MMOS cementitious materials by inhibiting hydration products and degrading pore structures. A higher GP content exacerbated the material's self-expansion during the later hydration stages. The MMOS cement system proved to be environmentally friendly in utilizing GP resources, markedly lowering the leaching concentrations of Cr, Zn, Ni, and Cu. The main mechanism of influence was the ionic substitution of the 5–1–7 phase by heavy metals. This study introduces a novel method for the resource utilization of heavy metal sludge.