Recently, the interest of scientists has turned towards eco-friendly metal nanoparticles due to their distinctive physicochemical properties that have been used in several biochemical and food applications, including drug and bioactive component delivery, sensing of food pathogenic bacteria, imaging techniques, and theranostics. Therefore, this study aimed to fabricate gum arabic stabilized iron hydroxide nanoparticles (IHNPs) using the co-precipitation process and to develop nanoparticles decorated antimicrobial cellulose paper. The agglomeration of IHNPs is a major concern, therefore, the varied concentration (0.25–2.0%) of gum arabic was used to functionalize and stabilize the nanoparticles, and based on UV-visible spectroscopy and particle size analysis, 1% gum arabic concentration was screened out. Scanning electron microscopy displayed polygonal disc shapes of IHNPs that had sides of approximately equal lengths. Energy dispersive spectroscopy was used to determine the purity of the IHNPs and results illustrated the elemental iron peak at 0.8 keV and 6.34 keV. For thermal stability, differential scanning calorimetry (DSC) was employed, and the glass transition temperature was observed at 138.50 °C with 138.31 °C onset and 147.14 °C endset temperature, respectively. Functionalized IHNPs showed a significantly (p < 0.05) higher zone of inhibition against S. aureus (29.63 mm) than that of E. coli and were found to be non-toxic to Caco-2 cells during cell viability assay. Time-kill kinetics showed that cellulose paper embedded with nanoparticles possessed excellent antibacterial activity against S. aureus. To explore the food application of developed cellulose paper, citric acid coagulated dairy product (Paneer), similar to cottage cheese was formulated, and it was evaluated for its microbial shelf life. The unwrapped sample showed higher microbial load during the fourth day of the storage. However, both wrapped samples were acceptable till the 10th of storage.