Diabetes mellitus (DM) is a chronic metabolic disorder that can lead to serious complications, including testicular dysfunction. This dysfunction is considered a significant cause of male infertility. Quercetin (Que), a naturally existing flavonoid with versatile biological functions, has limited water solubility and low bioavailability. The current study was designed to develop a bioavailable formulation of Que. via encapsulating it in PEGylated liposomes (Que-PEG-Lip) and determine whether this formulation is effective in the treatment of alloxan-induced testicular injury via targeting Kisspeptin/Neurokinin B/Dynorphin/steroidogenesis signaling pathway. Thirty-two male Sprague Dawley rats were randomly divided into four groups: Control, alloxan-induced diabetes with testicular dysfunction (ALX), ALX + metformin (MET) and ALX + Que-PEG-Lip. The results showed that treatment of ALX group with Que-PEG-Lip significantly improved the alteration of glycemic index, serum reproductive hormones, testicular antioxidant status, testicular Kiss-1, androgen receptor (AR), and proliferation marker protein (ki67) immunoexpression in compared to ALX group. Moreover, the treatment of ALX group with Que-PEG-Lip regulated the Kisspeptin/Neurokinin B/Dynorphin/steroidogenesis pathway gene expression. Interestingly, the outcomes of the molecular docking analysis revealed a strong agonistic effect of Que. on the kisspeptin, neurokinin, and dynorphin receptors. In conclusion, Que-PEG-Lip mitigated the testicular dysfunction in alloxan-induced diabetic rats via regulation of hypothalamic-pituitary-gonadal axis signaling pathway and alleviation the testicular oxidative stress.