Diabetes mellitus (DM) and its complications are a severe public health concern due to the high incidence, morbidity, and mortality rates. The present study aims to synthesize and characterize silver nanoparticles (AgNPs) using the aqueous leaf extract of Psidium guajava (PGE) for investigating its antidiabetic activity. Psidium guajava silver nanoparticles (PGAg NPs) were prepared and characterized by various parameters. The in vivo study was conducted using PGE and PGAg NPs in Streptozotocin (STZ)-induced diabetic rats to assess their antidiabetic properties. STZ of 55 mg/kg was injected to induce diabetes. The PGE, PGAg NPs at a dose of 200 and 400 mg/kg and standard drug Metformin (100 mg/kg) were administered daily to diabetic rats for 21 days through the oral route. Blood glucose level, body weight changes, lipid profiles, and histopathology of the rats’ liver and pancreas were examined. In the diabetic rats, PGE and PGAg NPs produced a drastic decrease in the blood glucose level, preventing subsequent weight loss and ameliorating lipid profile parameters. The histopathological findings revealed the improvements in pancreas and liver cells due to the repercussion of PGE and PGAg NPs. A compelling effect was observed in all doses of PGE and PGAg NPs; however, PGAg NPs exhibited a more promising result. Thus, from the results, it is concluded that the synthesized PGAg NPs has potent antidiabetic activity due to its enhanced surface area and smaller particle size of nanoparticles.