Background Diabetic neuropathy (DN) is recognized as a significant complication arising from diabetes mellitus (DM). Pathogenesis of DN is accelerated by endoplasmic reticulum (ER) stress, which inhibits autophagy and contributes to disease progression. Autophagy is a highly conserved mechanism crucial in mitigating cell death induced by ER stress. Chrysin, a naturally occurring flavonoid, can be found abundantly in honey, propolis, and various plant extracts. Despite possessing advantageous attributes such as being an antioxidant, anti-allergic, anti-inflammatory, anti-fibrotic, and anticancer agent, chrysin exhibits limited bioavailability. The current study aimed to produce a more bioavailable form of chrysin and discover how administering chrysin could alter the neuropathy induced by Alloxan in male rats. Methods Chrysin was formulated using PEGylated liposomes to boost its bioavailability and formulation. Chrysin PEGylated liposomes (Chr-PLs) were characterized for particle size diameter, zeta potential, polydispersity index, transmission electron microscopy, and in vitro drug release. Rats were divided into four groups: control, Alloxan, metformin, and Chr-PLs. In order to determine Chr- PLs’ antidiabetic activity and, by extension, its capacity to ameliorate DN, several experiments were carried out. These included measuring acetylcholinesterase, fasting blood glucose, insulin, genes dependent on autophagy or stress in the endoplasmic reticulum, and histopathological analysis. Results According to the results, the prepared Chr-PLs exhibited an average particle size of approximately 134 nm. They displayed even distribution of particle sizes. The maximum entrapment efficiency of 90.48 ± 7.75% was achieved. Chr-PLs effectively decreased blood glucose levels by 67.7% and elevated serum acetylcholinesterase levels by 40% compared to diabetic rats. Additionally, Chr-PLs suppressed the expression of ER stress-related genes (ATF-6, CHOP, XBP-1, BiP, JNK, PI3K, Akt, and mTOR by 33%, 39.5%, 32.2%, 44.4%, 40.4%, 39.2%, 39%, and 35.9%, respectively). They also upregulated the miR-301a-5p expression levels by 513% and downregulated miR-301a-5p expression levels by 65%. They also boosted the expression of autophagic markers (AMPK, ULK1, Beclin 1, and LC3-II by 90.3%, 181%, 109%, and 78%, respectively) in the sciatic nerve. The histopathological analysis also showed that Chr-PLs inhibited sciatic nerve degeneration. Conclusion The findings suggest that Chr-PLs may be helpful in the protection against DN via regulation of ER stress and autophagy.