•MgO nanoparticles were synthesised using a novel in-situ method.•Chitosan/MgO nanocomposite thin films were fabricated by solution casting method.•The addition of MgO into chitosan resulted in 86% improvement in tensile stress.•Chitosan/MgO nanocomposites exhibited higher thermal stability and flame retardancy.•Chitosan with MgO nanoparticles also showed superior UV-shielding abilities. Chitosan nanocomposite thin films were fabricated by incorporating MgO nanoparticles to significantly improve its physical properties for potential packaging applications. A novel in-situ method was developed to synthesise spherical shaped MgO nanoparticles by heat-treating magnesium carbonate/poly(methyl methacrylate) (PMMA) composite precursor. Optimum mechanical properties of chitosan composites were yielded at 5 (w/w%) of MgO concentration, where tensile stress and elastic modulus significantly improved by 86% and 38%, respectively, compared to those of pure chitosan films. These improvements are due to the interaction of hydroxyl and amine groups of chitosan with MgO as confirmed by FTIR spectroscopy. Fracture surface morphology indicated the interplay between MgO dispersion and aggregation on the mechanical properties at different MgO concentrations. Furthermore, the chitosan/MgO nanocomposites displayed remarkable thermal stability, flame retardant properties (satisfied V0 rating according to the UL-94 standards), UV shielding and moisture barrier properties, which could certainly add value to the packaging material.