The pathophysiology of chronic wounds related to diabetes mellitus is a result of a series of complications induced by hyperglycemia. The symptoms include impaired growth factor production, decreased keratinocyte proliferation and migration, reduced angiogenesis and cytokine synthesis, lowered matrix metalloproteinase (MMP) production, neuropathy, reduced nitric oxide synthase production, decreased fibroblast synthesis and migration, and impaired inflammatory cell functions. This multifaceted mechanism of diabetic wounds needs a suitable novel topical formulation that can deliver the active constituent by a controlled means, target the various stages of wound healing, absorb the wound exudates, and prevent secondary infections. To meet the above requirements, the Clerodendrum glandulosum (CG) extract reduced silver nanoparticle (AgNP) impregnated chitosan-polyethylene glycol (PEG) hydrogel was synthesized. The findings of the physicochemical characterization studies suggested that the hydrogel exhibited excellent formulation characteristics and showed controlled release for seven days, making it suitable for chronic wound healing studies. In subsequent studies, these formulations showed good antioxidant and antimicrobial properties, and hemocompatibility, with the least cytotoxic properties. The results of the diabetic wound healing studies showed a faster wound closure rate and improved extracellular matrix formation. These antioxidant, antimicrobial, anti-inflammatory and wound-healing properties suggest that the CG-AgNP loaded chitosan-PEG hydrogel is a promising material for novel topical formulation of diabetic wounds.