Polymeric hydrogels have been extensively explored for controlled drug-delivery applications, but there is an increasing demand for smart drug delivery combined with tunable physicochemical attributes and tissue engineering potential. In this work, novel xanthan-poly(ethylene glycol) (PEG) hydrogels were developed by cross-linking polysaccharide, oxidized xanthan, and 8-arm PEG hydrazine through dynamic, pH-responsive, and biodegradable hydrazone linkages. Aqueous solutions (pH 6.5) of oxidized xanthan and PEG hydrazine were mixed together at 37 °C to obtain hydrogels within minutes, and the formation of hydrazone linkages was ascertained using Fourier transform infrared spectroscopy. Fabrication of xanthan-PEG hydrogels using hydrazone linkages has not been reported previously. The 3% hydrogels exhibited the storage modulus of 194 Pa, which increased to 770 Pa for 5% hydrogels. When subjected to alternating cycles of varying strains of 1 and 800% (5 cycles), hydrogels demonstrated instant recovery each time the extreme strain was relieved, thus suggesting excellent self-healing capabilities. Doxorubicin (DOX), chemotherapeutic agent, was loaded onto hydrogels, and release studies were carried out at pH 5.5 (tumoral) and 7.4 (physiological). The cumulative release from 3, 4, and 5% hydrogels at pH 5.5 was 81.06, 61.98, and 41.67%, whereas the release at pH 7.4 was 47.43, 37.01, and 35.34% at 30 days. MTT assay showed that oxidized xanthan and PEG hydrazine are not toxic to mammalian cells (NIH-3T3), as the cell viabilities were found to be 84.66 and 102% for concentrations up to 1 mg/mL. The live/dead assay with encapsulated NIH-3T3 cells showed no significant dead cell population, suggesting excellent compatibility of hydrogels in 2D and 3D culture. DOX-loaded hydrogels exhibited cytotoxicity against A549 cells when exposed to media released from hydrogels. Overall, hydrogels developed in this work may have potential applications in drug delivery and 3D cell culture for cell delivery.