Biocompatible hydrogels were prepared by mixing aqueous-acidic solution of chitosan with alkali lignin, a major by-product of the paper producing industries, for the first time, by sustainable means. Electrostatic interactions between the phenoxide groups in lignin and the ammonium groups on the chitosan backbone were found to be responsible for the ionotropic cross-linking. These gels were non-toxic to Mesenchymal stem cells, in vitro, and to zebrafish up to 100 μg/ml, in vivo. In addition, these gels provided a conducive surface for cell attachment and proliferation, making it suitable for application as scaffolds in tissue engineering. In presence of the hydrogel, NIH 3T3 mouse fibroblast cells showed good cell migration characteristics suggesting that the gel might be suitable for wound healing application. The chitosan-alkali lignin gelation system was further capable of removing ferric ions from contaminated water by way of complexation and coagulation. Cross-linked films of chitosan and alkali lignin could also be prepared by simply immersing chitosan films into a solution of alkali lignin. Alkali lignin was observed to diffuse into the chitosan “crystal”, forming electrostatic cross-links between the chitosan chains. The choice of lignin, in comparison to the other ionotropic cross-linkers for chitosan, makes the cross-linking system, inexpensive and sustainable. © 2019 Elsevier B.V.