Submerged liquid plasma (SLP) is a new and promising method to modify powder materials. Up to now, this technique has been mostly applied to carbonaceous materials, however, SLP shows great potential as a low-cost and environmental-friendly method to modify cellulose. In this work we demonstrate the modification of microcrystalline cellulose (MCC) by applying the SLP combined with ultrasonication treatments. The plasma generated either in an inert (argon) or reactive (argon: oxygen or argon:nitrogen) gas was used in MCC dispersions in water or acetonitrile:water mixtures. An enhanced defibrillation of MCC has been observed following the application of SLP. Furthermore, X-ray photoelectron spectroscopy and Fourier transform infrared spectroscopy have been applied to investigate the surface functionalization of MCC with oxygen or nitrogen moieties. Depending on the plasma treatment applied, poly (3-hydroxybutyrate) composites fabricated with the plasma modified cellulose fibers showed better thermal stability and mechanical properties than pristine PHB. This submerged liquid plasma processing method offers a unique approach for the activation of cellulose for defibrillation and functionalization, aiming towards an improved reinforcing ability of biopolymers.