Objective. To evaluate the effect of warm needle acupuncture plus Xitong Waixi lotion on the levels of IL-1, TNF-α, and MMP-3 in patients with knee osteoarthritis. Methods. Eighty patients with knee osteoarthritis admitted to our hospital from October 2019 to June 2021 were recruited and assigned via the random number table method at a ratio of 1 : 1 to receive either Xitong Waixi lotion (conventional group) or warm needle acupuncture plus Xitong Waixi lotion (combined group). Outcome measures included clinical efficacy, inflammatory cytokine level, Western Ontario and McMaster Universities Arthritis Index (WOMAC) score, visual analogue scale (VAS) score, Hospital for Special Surgery (HSS) knee score, and adverse reactions. Results. Warm needle acupuncture plus Xitong Waixi lotion was associated with a significantly higher clinical efficacy versus Xitong Waixi lotion alone (
P
=
0.006
). Patients in the combined group had significantly lower levels of interleukin (IL)-1, tumor necrosis factor-α (TNF-α), and matrix metalloproteinase-3 (MMP-3) than those in the conventional group (
P
=
0.020
). Warm needle acupuncture plus Xitong Waixi lotion resulted in significantly lower WOMAC scores and VAS scores and higher HSS scores for the patients versus Xitong Waixi lotion (
P
=
0.012
). The two groups had a similar incidence of adverse events (
P
=
0.068
). Conclusion. Warm needle acupuncture plus Xitong Waixi lotion effectively alleviates the inflammatory response and knee pain in patients with knee osteoarthritis, with significant clinical effects and a high safety profile.