The modulation of decaying isotropic turbulence by 45 000 spherical particles of Kolmogorov-length-scale size is studied using direct particle–fluid simulations, i.e. the flow field over each particle is fully resolved by direct numerical simulations of the conservation equations. A Cartesian cut-cell method is used by which the exchange of momentum and energy at the fluid–particle interfaces is strictly conserved. It is shown that the particles absorb energy from the large scales of the carrier flow while the small-scale turbulent motion is determined by the inertial particle dynamics. Whereas the viscous dissipation rate of the bulk flow is attenuated, the particles locally increase the level of dissipation due to the intense strain rate generated near the particle surfaces due to the crossing-trajectory effect. Analogously, the rotational motion of the particles decouples from the local fluid vorticity and strain-rate field at increasing particle inertia. The high level of dissipation is partially compensated by the transfer of momentum to the fluid via forces acting at the particle surfaces. The spectral analysis of the kinetic energy budget is supported by the average flow pattern about the particles showing a nearly universal strain-rate distribution. An analytical expression for the instantaneous rate of viscous dissipation induced by each particle is derived and subsequently verified numerically. Using this equation, the local balance of fluid kinetic energy around a particle of arbitrary shape can be precisely determined. It follows that two-way coupled point-particle models implicitly account for the particle-induced dissipation rate via the momentum-coupling terms; however, they disregard the actual length scales of the interaction. Finally, an analysis of the small-scale flow topology shows that the strength of vortex stretching in the bulk flow is mitigated due to the presence of the particles. This effect is associated with the energy conversion at small wavenumbers and the reduced level of dissipation at intermediate wavenumbers. Consequently, it damps the spectral flux of energy to the small scales.