Polyethylene glycol (PEG) is hydrophilic, biocompatible, and electrically neutral in an aqueous solution due to its unique internal structure. PEG is widely used to prepare hydrogels for applications in drug delivery and tissue engineering. In addition, PEG can be used as a functionalization agent of biomaterials to prolong the presence of drug systems in vivo in biomedical applications. The functionalization of PEG hydrogels using functional peptides gives PEG hydrogels the advantages of better biocompatibility, higher loading efficiency, more adjustable lifetime, and lower cost, which have exhibited promising applications in biomedical fields. In this review, recent advances in the functionalization of PEG hydrogels with peptides for biomedical applications are presented. For this aim, first, the basic properties of PEG hydrogels are described by introducing various preparation methods, and then, the functional regulation of PEG hydrogels is demonstrated with different motif‐designed peptides to achieve specific properties. Finally, biomedical applications of peptide‐engineered PEG hydrogels in controlled drug delivery, tissue engineering, medical diagnostics, bioimaging, and biosensing are described in detail. This work provides a systematic literature review on this promising topic and facilitates readers in the design of composite materials and functional tailoring of PEG hydrogels with biomolecules.