In the present study, a renewable resource-based, dynamically cross-linked hydrogel was developed using a combination of polyvinyl alcohol (PVA), lignin (LIG), and quercetin (QUE). LIG was extracted from peanut shells and served as a renewable resource-based polymer. QUE was used for its increased biological activity. Boric acid was used to cross-link the hydrogel via a borate ester bond formation. Using FTIR spectroscopy, XRD, and HR-SEM, the hydrogel structural characteristics were thoroughly examined. The results demonstrated effective molecular incorporation, decreased crystallinity, and the formation of a porous surface morphology suitable for tissue regeneration. The MTT assay was used to examine the hydrogel's in vitro cytocompatibility, and the results demonstrated that the hydrogel is compatible with cell growth and shows no toxicity. Significantly faster wound closure and better tissue regeneration were seen in the PVA-LIG-QUE-treated group when compared to the povidone-iodine-treated control in an in vivo assessment using streptozotocin-induced mice models. Additionally, improved epithelial regeneration and higher blood perfusion in the PVA-LIG-QUE-treated wounds were confirmed by advanced imaging methods such as ultrasound and photoacoustic imaging. Overall, the findings show that the hydrogel is a durable, bioactive substance with great promise for successful diabetic wound healing.