Biosynthesized nanoparticles have a promising future since they are a more environmentally friendly, cost-effective, repeatable, and energy-efficient technique than physical or chemical synthesis. In this work, Purpureocillium lilacinum was used to synthesize iron oxide nanoparticles (Fe2O3-NPs). Characterization of mycosynthesized Fe2O3-NPs was done by using UV–vis spectroscopy, transmission electron microscope (TEM), dynamic light scattering (DLS), and X-ray diffraction (XRD) analysis. UV–vis gave characteristic surface plasmon resonance (SPR) peak for Fe2O3-NPs at 380 nm. TEM image reveals that the morphology of biosynthesized Fe2O3-NPs was hexagonal, and their size range between 13.13 and 24.93 nm. From the XRD analysis, it was confirmed the crystalline nature of Fe2O3 with average size 57.9 nm. Further comparative study of photocatalytic decolorization of navy blue (NB) and safranin (S) using Fe2O3-NPs was done. Fe2O3-NPs exhibited potential catalytic activity with a reduction of 49.3% and 66% of navy blue and safranin, respectively. Further, the antimicrobial activity of Fe2O3-NPs was analyzed against pathogenic bacteria (Pseudomonas aeruginosa, Escherichia coli, Bacillus subtilis, and Staphylococcus aureus). The Fe2O3-NPs were clearly more effective on gram-positive bacteria (S. aureus and B. subtilis) than gram-negative bacteria (E. coli and P. aeruginosa). Thus, the mycosynthesized Fe2O3-NPs exhibited an ecofriendly, sustainable, and effective route for decolorization of navy blue and safranin dyes and antibacterial activity.