Water soluble luminescent gold nanoparticles with average size 2.3 nm were for the first time synthesized by completely green method of Au(III) reduction using chitosan derivative—biocompatible nontoxic N -(4-imidazolyl)methylchitosan (IMC) as both reducing and stabilizing agent. Reduction of Au(III) to gold nanoparticles in IMC solution is a slow process, in which coordination power of biopolymer controls both reducing species concentration and gold crystal growth rate. Gold nanoparticles formed in IMC solution do not manifest surface plasmon resonance, but exhibit luminescence at 375 nm under UV light excitation at 230 nm. Due to biological activity of imidazolyl-containing polymers and their ability to bind proteins and drugs, the obtained ultra-small gold nanoparticles can find an application for biomolecules detection, bio-imaging, drug delivery, and catalysis. Very high catalytic activity (as compared to gold nanoparticles obtained by other green methods) was found for Au/IMC nanoparticles in the model reaction of p -nitrophenol reduction providing complete conversion of p -nitrophenol to p -aminophenol within 180–190 s under mild conditions.