The current study demonstrates the extracellular biosynthesis of silver nanoparticles (AgNPs) from a local fungal isolate as a simple, safe and eco-friendly alternative to physical and chemical procedures. A local fungi isolate was isolated from soil samples and then tested for their silver resistance. The most silver resistant isolate was chosen for the biosynthesis of AgNPs, which was identified genetically as Penicillium oxalicum DS-2 dependent on the sequence of 5.8S rRNA gene. For the detection and characterization of AgNPs, UV-Vis spectroscopy and transmission electron microscopy (TEM) were used. The appearance of a brown color after adding silver nitrate to the fungal filtrate and UV- visible absorbance peak around 410 nm emphasized the biosynthesis of AgNPs. The image of TEM showed that the biosynthesized AgNPs were spherical shape with some elongated particles and the size of particles was in the range 13–35 nm. The biosynthesized AgNPs were coated and stabilized using chitosan in form of chitosan-AgNPs (Cs-AgNPs). The antibacterial activity of the AgNPs and Cs-AgNPs were evaluated on three pathogenic bacterial strains including Pseudomonas aeruginosa, Escherichia coli (Gram negative) and Staphylococcus aureus (Gram- positive). Both AgNPs and Cs-AgNPs achieved strong antibacterial activities compared to streptomycin as standard antibiotic. Cs-AgNPs had higher antibacterial activity than AgNPs. Scanning electron microscopy (SEM) analysis showed that Cs-AgNPs densely accumulated and adhered to the surface of treated bacterial cells, with consequent penetration of silver nanoparticles into the cell walls and cell death. The results of SEM confirmed the superiority of Cs-AgNPs as a promising antibacterial.