Sepsis‐associated encephalopathy (SAE) is characterized by high incidence and mortality rates, with limited treatment options available. The underlying mechanisms and pathogenesis of SAE remain unclear. Annexin A1 (ANXA1), a membrane‐associated protein, is involved in various in vivo pathophysiological processes. This study aimed to explore the neuroprotective effects and mechanisms of a novel bioactive ANXA1 tripeptide (ANXA1sp) in SAE. Forty Sprague–Dawley rats were randomly divided into four groups (n = 10 each): control, SAE (intraperitoneal injection of lipopolysaccharide), vehicle (SAE + normal saline), and ANXA1sp (SAE + ANXA1sp) groups. Changes in serum inflammatory factors (interleukin‐6 [IL‐6], tumor necrosis factor‐α [TNF‐α]), hippocampal reactive oxygen species (ROS), mitochondrial membrane potential (MMP), and adenosine triphosphate (ATP) levels were measured. The Morris water maze and Y maze tests were used to assess learning and memory capabilities in the rats. Further, changes in peroxisome proliferator–activated receptor‐gamma (PPAR‐γ) and apoptosis‐related protein expression were detected using western blot. The IL‐6, TNF‐α, and ROS levels were significantly increased in the SAE group compared with the levels in the control group. Intraperitoneal administration of ANXA1sp led to a significant decrease in the IL‐6, TNF‐α, and ROS levels (p < 0.05). Compared with the SAE group, the ANXA1sp group exhibited reduced escape latency on day 5, a significant increase in the number of platform crossings and the percent spontaneous alternation, and significantly higher hippocampal MMP and ATP levels (p < 0.05). Meanwhile, the expression level of PPAR‐γ protein in the ANXA1sp group was significantly increased compared with that in the other groups (p < 0.05). The expressions of apoptosis‐related proteins (nuclear factor‐kappa B [NF‐κB], Bax, and Caspase‐3) in the SAE and vehicle groups were significantly increased, with a noticeable decrease in Bcl‐2 expression, compared with that noted in the control group. Moreover, the expressions of NF‐κB, Bax, and Caspase‐3 were significantly decreased in the ANXA1sp group, and the expression of Bcl‐2 was markedly increased (p < 0.05). ANXA1sp can effectively reverse cognitive impairment in rats with SAE. The neuroprotective effect of ANXA1sp may be attributed to the activation of the PPAR‐γ pathway, resulting in reduced neuroinflammatory response and inhibition of apoptosis.