Multidrug-resistant (MDR) pathogens and mycotoxin contamination in food systems require safe and sustainable antimicrobial strategies. Although plant essential oils possess strong antimicrobial properties, their practical application is limited by high volatility and chemical instability. This study developed chitosan-encapsulated nanoparticles loaded with Artemisia pallens essential oil (APEO) to improve its antimicrobial efficacy. APEO was extracted by hydrodistillation and analyzed using gas chromatography–mass spectrometry (GC–MS), which identified 18 phytochemical constituents, with davanone (39.65%) and bicyclogermacrene (28.29%) as the major compounds. Chitosan nanoparticles synthesized via ionic gelation and characterized using X-ray diffraction (XRD), dynamic light scattering (DLS), and scanning electron microscopy (SEM). The optimized nanoformulation (chitosan ratio 1:0.6) exhibited high encapsulation efficiency (72.80%), loading capacity (18.61%), particle size of 131–192 nm, low polydispersity index (0.103–0.194), and positive zeta potential (+ 22.4 to + 31.2 mV), indicating good colloidal stability. The nanoencapsulated formulation (APEOCne) showed enhanced antibacterial activity against Escherichia coli, Klebsiella pneumoniae, Proteus vulgaris, and Staphylococcus aureus, and antifungal activity against Aspergillus flavus, Aspergillus niger, and Fusarium verticillioides compared with free APEO. It also completely inhibited aflatoxin B1 and fumonisin B1 production at 2.0 mg L⁻¹. Molecular docking suggested strong binding of davanone to aflatoxin biosynthetic enzymes (Ver-1 and Omt-A).