Low mechanical strength and untargeted osteoinduction of chitosan hydrogel limit its application for bone regeneration. This study aimed to develop an injectable chitosan hydrogel with enhanced mechanical strength and improved osteoinductivity for bone tissue engineering. For this purpose, chitosan-modified halloysite nanotubes (mHNTs) were synthesized first. Then, icariin as a bone inducer was loaded into mHNTs (IC@mHNTs), resulting in a sustained drug release system. Further, nanocomposite chitosan/mHNTs hydrogels were prepared by the sol-gel transition, leading to decreased gelation time and temperature and enhanced mechanical strength of the resulting scaffolds. The mesenchymal stem cells were encapsulated into the hydrogels, and in vitro viability assays showed scaffold biocompatibility. Moreover, embedded mHNTs or IC@mHNTs in the scaffold resulted in enhanced proliferation and bone differentiation of encapsulated cells. It was collectively demonstrated that the injectable in situ forming nanocomposite chitosan hydrogel loaded with IC@mHNTs is a promising candidate for bone regeneration.