Objective To investigate the clinical effect of external application of Xiaoyu Jiegu Powder in the treatment of early-to-mid knee osteoarthritis. Methods A total of 60 patients with knee osteoarthritis were randomly divided into observation group (treated with external application of Xiaoyu Jiegu Powder) and control group (treated with oral celecoxib capsules), with 30 patients in each group. The patients were followed up for 12 weeks after 2 weeks of treatment, and the two groups were compared in terms of clinical outcome and the changes in related indices after treatment, including erythrocyte sedimentation rate (ESR), alkaline phosphatase (ALP), hypersensitive C-reactive protein (hs-CRP), platelet count (PLT), Visual Analogue Scale (VAS) score, Western Ontario and McMaster Universities Osteoarthritis Index (WOMAC), and Lequesne MG score for the severity of osteoarthritis. Results The observation group had a better clinical outcome than the control group, and there was no significant difference in the distribution of clinical outcomes between the two groups (P>0.05). The observation group had significant reductions in hs-CRP, ALP, and PLT after treatment (P<0.05), and the observation group had a significantly greater reduction in PLT than the control group (P<0.05). Both groups had significant reductions in WOMAC, VAS, and Lequesne MG scores and a significant increase in the range of motion of the knee joint after treatment (P<0.05). There were no significant changes in WOMAC, VAS, and Lequesne MG scores from the end of the 2-week treatment to follow-up (P>0.05), but there was a significant increase in the range of motion of the knee joint (P<0.05). At the end of the 2-week treatment and during follow-up, the observation group had significantly lower WOMAC, VAS, and Lequesne MG scores than the control group (P<0.05); at the end of the 2-week treatment, the observation group had a significantly higher range of motion of the knee joint than the control group (P<0.05); during follow-up, there was no significant difference in the range of motion of the knee joint between the two groups (P>0.05). Conclusion External application of Xiaoyu Jiegu Powder has a good clinical effect in the treatment of early-to-mid knee osteoarthritis and can significantly improve clinical symptoms, knee function, and patients' quality of life.