Poly(vinyl alcohol) hydrogel films containing (1-5% (w/w)) chitosan-modified montmorrilonite (CsMMT) were prepared through phase separation method for wound dressing application. The prepared nanocomposites were characterized by Fourier transform infra-red (FTIR), X-ray diffraction (XRD), scanning electron microscopy (SEM) and transmission electron microscopy (TEM). The effects of organoclay content on gel fraction, water vapor permeability, water uptake and tensile/rheological properties of films were also investigated. The XRD patterns and TEM micrographs show intercalated/partially exfoliated morphology of nanocomposites. The strong interactions between the polymer matrix and silicate layers via the formation of hydrogen bonds increase the gel fraction and tensile strength of hydrogels. It was found that the equilibrium water absorption, water diffusion coefficient and water vapor permeability were strongly affected by crystallite size of PVA macromolecules and tortuous path originated from CsMMT. The most appropriate results for the examined properties were obtained for 3% CsMMT content (w/w). The rheological results indicated a dominant elastic property and strong network structure for the hydrogels. The wound dressing films were loaded with nitrofurazone (NFZ) and their drug release behavior was studied at simulated wound condition. The drug loading and the release rate of NFZ showed a dependency on the quantity of CsMMT in the membrane. The interaction between NFZ and CsMMT together with tortuosity due to the presence of silicate layers, controlled the duration of total drug release to over 6 days. A Fickian diffusion mechanism was found for the drug release from the nanocomposite membranes.