An acid-free water-born chitosan derivative/montmorillonite has been successfully synthesized. A natural-based biopolymer, N-(2-hydroxy) propyl-3-trimethyl ammonium chitosan chloride, was synthesized, and its structure confirmed by Fourier transform infrared microscopy and conductometric titration. It was applied to the cationic ion-exchange reaction of montmorillonite. Then, the synthesized materials were used to produce water-born composite scaffolds for tissue engineering applications and formed an ultra-fine bead-free multicomponent nanofibrous scaffold. The scaffold was subjected to in vitro and in vivo investigations. The effects of both acidic and neutral reaction media on the efficiency of the cationic ion-exchange reaction of montmorillonite were investigated. A mechanism has been suggested for the more efficient cationic ion-exchange reaction achieved in the absence of the acid. In in vitro studies, the modified montmorillonite showed synergistic biocompatibility and cell growth with enhanced bioactivity compared to unmodified clay and even chitosan and the chitosan derivative. Scanning electron microscopy showed ultra-fine bead-free nanocomposite nanofibers. Improved biocompatibility, cell attachment, and cell growth were observed for the nanofibrous scaffolds compared to the individual components. In vivo experiments showed complete restoration of a critical-sized full-thickness wound without infection in 21 d. The technique provides a guideline to achieve chitosan nanofibrous morphology for multifunctional biomedical applications.