Biodegradable polymers have been developed for medical applications such as surgical sutures, drug delivery devices, tissue supports and implants for interior bone fixation. However, implants are highly susceptible to microbial adhesion, which can ultimately lead to the formation of bio-films. The goal of the current study was to fabricate a biocompatible and antibacterial nanofibrous poly(epsilon-caprolactone) (PCL) scaffold for tissue engineering applications. To develop such a scaffold, silver nanoparticles synthesized by a novel in situ reduction route were incorporated into the PCL matrix during the process of electrospinning. The electrospun PCL and composite PCL/nanosilver fiber mats were characterized for their physico-chemical parameters using UV-VIS, SEM, XRD, FTIR and EDAX. Antibacterial activity of the composite scaffold was tested against Staphylococcus aureus using disc diffusion method and cytotoxicity evaluated using alamar blue assay. Cell adhesion studies carried out using human Mesenchymal Stem Cells (hMSCs) seeded on the scaffold containing the lowest concentration of silver nanoparticles (0.2 mM) revealed that Ag nanoparticles can be effectively used as a growth inhibitor of microorganisms, without compromising on the cell adhesion. Thus, nanosilver incorporated PCL fibrous scaffold can be a potential candidate for tissue engineering applications, possessing multifunctional properties.