PEGylation (i.e., attachment of polyethylene-glycol) of carbon nanotubes (CNTs) is one of the most widely used strategies to improve its biocompatibility and aqueous dispersion stability, which are critical for their successful clinical application. However, PEGylation of nanomaterials has recently been associated with production of anti-PEG antibody, low cellular uptake, and degradation. Herein, we explore surface functionalization of CNTs using the bovine-milk-derived protein succinylated β-lactoglobuline (Sblg) as an alternative strategy to PEGylation. The aqueous dispersion stability, in vitro cell uptake and biocompatibility of Sblg-functionalized multiwalled CNTs (Sblg-f-MWCNTs) was compared to PEGylated MWCNTs (PEG-f-MWCNTs). The surface functionalization with Sblg was found to improve the IC50 values of CNTs by ∼5- to 6-fold in comparison with pristine CNTs in various cell lines. Both Sblg-f-MWCNTs and PEG-f-MWCNTs improved the aqueous colloidal stability of CNTs, which remained suspended for a period of one month. Our study concluded that the Sblg provides a cost-effective alternative to the PEG-based CNT functionalization with significant improvement in the biocompatibility and dispersion stability of CNTs.