This study explored the potential of abundantly available sodium lignosulfonate (LS) as a reducer and fabricating agent in preparing silver nanoparticles (LS–Ag NPs). The operational conditions were optimized to make the synthesis process simpler, rapid, and eco-friendly. The prepared LS–Ag NPs were analyzed via UV–Vis spectroscopy, X-ray diffraction spectroscopy, Fourier transform infrared spectroscopy, and high-resolution transmission electron microscopy. Results demonstrated that LS–Ag NPs were of crystalline structure, capped with LS constituents, and spherical in shape with a size of approximately 20 nm. Under optimized conditions, LS–Ag NPs exhibited significant photocatalytic activity in Reactive Yellow 4G degradation. The effects of photocatalyst (LS–Ag NPs) dosage, dye concentration, and its reusability for dye degradation were studied to make the process practically applicable in textile wastewater treatment. Additionally, the synthesized LS–Ag NPs displayed significant free radical scavenging against 2-diphenyl-1-picrylhydrazyl (DPPH) with an IC50 value of (50.2 ± 0.70 µg/mL) and also exhibited antidiabetic activity in terms of inhibition in the activity of carbohydrate-degrading marker enzyme α-glucosidase with an IC50 value of (58.1 ± 0.65 µg/mL). LS–Ag NPs showed substantial antibacterial potential against pathogenic strains, namely E. coli and S. aureus. In conclusion, LS–Ag NPs can be a reliable and eco-friendly material for their possible application in the treatment of dye-containing wastewater and have a great perspective in the biomedical and pharmaceutical sectors.