The aim of this study was to evaluate the effectiveness of balance exercises on functional status, pain, balance, and central sensitization in patients with knee osteoarthritis (OA). Patients diagnosed with bilateral Kellgren–Lawrence grade ≥ 2 primary knee OA and associated central sensitization were included in the study. Patients were randomized into two groups. Both groups were provided with verbal and written information on knee OA. In addition, the intervention group received a supervised balance exercise program for 6 weeks, 3 days a week on alternating days. The outcome measures were the changes in the Central Sensitization Inventory (CSI), Visual Analog Scale (VAS) pain, the Western Ontario and McMaster Universities Osteoarthritis Index (WOMAC), Berg Balance Scale, and Y Balance Test. Evaluations were performed at baseline, immediately after treatment (6th week) and at 12th week. The study included 40 patients, 20 patients in each group. At the end of the treatment period (6th week), the improvement in CSI score, WOMAC pain, WOMAC physical function, WOMAC total score, Y Balance Test scores, and VAS pain during activity was significantly greater in the intervention group than that in the control group (p < 0.001). Regarding the changes from baseline to the 12th week, the intervention group experienced greater improvement in most of the outcome measures. Yet, the change in WOMAC pain score, Berg Balance Scale score, and VAS pain at rest was similar between the study groups (p = 0.05, p = 0.257, and p = 0.385, respectively). A two-model multiple linear regression analysis revealed that the changes in VAS pain (during activity) after the treatment and at follow-up [(p = 0.004, adjusted R2: 0.346) and (p = 0.002, adjusted R2: 0.391), respectively], as well as changes in WOMAC pain from baseline to follow-up (p = 0.020, ΔR2 = 0.245) significantly affected central sensitization. However, changes in Y Balance Test and WOMAC total scores did not appear to have a significant impact on the improvement in central sensitization (p > 0.05). Balance exercises may provide improvement in central sensitization, functional status, and dynamic balance among patients with knee OA. The improvement in central sensitization depends mostly on the pain relief effect of balance exercises.