Bone repair and regeneration processes are markedly impaired in diabetes mellitus (DM). Intervening approaches similar to those developed for normal healing conditions have been adopted to combat DM-associated bone regeneration. However, limited outcomes were achieved for these approaches. Hence, together with osteoconductive hydroxyapatite (HA) nanocrystals, osteoinductive magnesium oxide (MgO) nanocrystals were uniformly mounted into the network matrix of an organic hydrogel composed of cysteine-modified γ-polyglutamic acid (PGA-Cys) to construct a hybrid and rough hydrogel scaffold. It was hypothesized that the HA/MgO nanocrystal hybrid hydrogel (HA/MgO-H) scaffold can significantly promote bone repair in DM rats via the controlled release of Mg²⁺. The HA/MgO-H scaffold exhibited a sponge-like morphology with porous 3D networks inside it and displayed higher mechanical strength than a PGA-Cys scaffold. Meanwhile, the HA/MgO-H scaffold gradually formed a tough hydrogel with G′ of more than 1000 Pa after hydration, and its high hydration swelling ratio was still retained. Moreover, after the chemical degradation of the dispersed MgO nanocrystals, slow release of Mg²⁺ from the hydrogel matrix was achieved for up to 8 weeks because of the chelation between Mg²⁺ and the carboxyl groups of PGA-Cys. In vitro cell studies showed that the HA/MgO-H scaffold could not only effectively promote the migration and proliferation of BMSCs but could also induce osteogenic differentiation. Moreover, in the 8th week after implanting the HA/MgO-H scaffold into femur bone defect zones of DM rats, more effective bone repair was presented by micro-CT imaging. The bone mineral density (397.22 ± 16.36 mg cm⁻³), trabecular thickness (0.48 ± 0.07 mm), and bone tissue volume/total tissue volume (79.37 ± 7.96%) in the HA/MgO-H group were significantly higher than those in the other groups. Moreover, higher expression of COL-I and OCN after treatment with HA/MgO-H was also displayed. The bone repair mechanism of the HA/MgO-H scaffold was highly associated with reduced infiltration of pro-inflammatory macrophages (CD80⁺) and higher angiogenesis (CD31⁺). Collectively, the HA/MgO-H scaffold without the usage of bioactive factors may be a promising biomaterial to accelerate bone defect healing under diabetes mellitus.