Negatively charged lipopolysaccharide (LPS), a major endotoxin and component of the outer membrane of several Gram-negative bacteria, provides a useful biomarker for the indirect detection of these pathogens. For instance, Escherichia coli (E. coli) is a pathogenic bacterium that causes infections in almost all age groups, and has been implicated in food and water contamination. Current diagnostic and detection methods tend to be labor-intensive or expensive, necessitating the need for an easy, sensitive, rapid, and low-cost method. We report on the synthesis and use of positively charged chitosan stabilized silver nanoparticles (Chi-AgNPs) as a sensitive electrochemical nanobiosensor for the detection of LPS. Chi-AgNPs were synthesized through a facile, single step protocol, and characterized for size, charge, and morphology. Glassy carbon electrodes modified with Chi-AgNPs resulted in an enhancement of signal in the presence of both LPS and E. coli. Detection was accomplished over a large concentration range (several orders of magnitude) of 0.001–100 ng/mL and 10–107 CFU/mL. The biosensors can reliably detect LPS and E. coli at very low concentrations. Chi-AgNPs have potential as low cost, sensitive nanobiosensors for Gram-negative bacteria due to strong electrostatic interaction with LPS present in their outer membranes.