This study reports the synthesis and application of a polythiophene–iron oxide (PTh‐Fe0‐Fe2O3) nanocomposite as a highly effective catalyst for the selective reduction of nitro aromatics in an aqueous environment. The nanocomposite was synthesized using in situ chemical polymerization, with Fe0‐Fe2O3 nanoparticles created from ferric chloride solution using Camellia sinensis leaf extract as a reducing and stabilizing agent at room temperature. Characterization techniques, including XRD, FTIR, SEM–EDX, TEM, XPS, and UV–Vis spectroscopy, confirmed the successful integration of Fe0‐Fe2O3 into the polythiophene matrix. The nanocomposite demonstrated higher electrical conductivity compared to PTh alone, ranging from 20 S/cm at 313 K to 53 S/cm at 373 K. Magnetic studies indicated a saturation magnetization of 23.1 emu/g, lower than the 42.6 emu/g of Fe0‐Fe2O3 nanoparticles, attributed to the non‐magnetic nature of PTh. Under optimal conditions (4‐nitrobenzaldehyde [1 mmol], catalyst [0.04 g], and water [5 mL] in air), the catalyst achieved a 94% yield in the reduction of nitrobenzenes within 7 h, demonstrating broad applicability and retaining significant catalytic activity over six cycles. Furthermore, the PTh‐ Fe0‐Fe2O3 nanocomposite exhibited notable methanol gas sensing capabilities, with a sensitivity of 52.6 at 200‐ppm methanol. The sensor exhibited a response time of 60 s and a recovery time of 80 s, attributed to its n‐type semiconductor characteristics and abundant oxidative‐reductive sites. Computational studies supported the methanol sensing mechanism, highlighting significant O… S interactions and stable non‐covalent interactions between methanol and the nanocomposite. This study is the first to introduce a novel magnetic nanocatalyst for the cost‐effective and eco‐friendly reduction of nitroarenes, while also demonstrating its applicability in gas sensing. The research highlights an environmentally sustainable synthesis process and enhanced material properties, showcasing the nanocatalyst's potential for diverse applications.