There is an increased demand for an ideal biodegradable biomaterial that eradicates infection, while concurrently promoting tissue regeneration in osteomyelitic bone, which eliminates the need for revision surgery. In this study, our objective was to evaluate the efficacy of a nanocomposite fibrous scaffold (silica coated nanohydroxyapatite–gelatin reinforced with poly-L-lactic acid yarns) containing vancomycin for treating methicillin-resistant Staphylococcus aureus (MRSA) induced osteomyelitis in rat models. The antibiotic was either incorporated during scaffold synthesis (SE-V) or loaded directly after the development of the scaffold (SA-V) at 5 wt% and 15 wt%. There was a sustained release of vancomycin from both the groups of scaffolds for 30 days and the released drug demonstrated antibacterial activity against MRSA. Furthermore, implantation of the composite scaffold into osteomyelitic rat femur resulted in significant bacterial reduction, mainly with 15 wt% drug and its efficacy was comparable to that of commercial graft Stimulan. Both drug entrapped and absorbed composite scaffolds promoted bone regeneration in 3 months, with no distinguishable difference between them. However, Stimulan resorbed fast and there were bone voids at the defect site after 3 months. Hence, the nanocomposite fibrous scaffold containing vancomycin can be proposed as a bi-functional graft that can reduce bacterial infection, while subsequently engineer new bone in osteomyelitis.