In order to meet the advanced requirements of the manufacturing industry, the use of water-based cutting fluids (WCFs) in metal processing is gradually increasing. However, their lubrication performance still needs to be improved considerably. Therefore, new multifunctional molybdenum disulfide nanoparticles (m-MoS2 NPs) were developed to improve the lubricating properties of WCFs. M-MoS2 NPs modified with silver nanoparticles were prepared by an in situ surface modification. The morphology and chemical composition of the m-MoS2 NPs were characterized by scanning electron microscopy (SEM), high-resolution transmission electron microscopy (HR-TEM), X-ray diffraction (XRD), and X-ray photoelectron spectroscopy (XPS). Furthermore, the dispersion and bactericidal properties of m-MoS2 NPs with different weight percents in WCFs were also studied experimentally. The effect of m-MoS2 NPs concentration on friction properties and their friction mechanism were investigated in this research. The results revealed that the prepared m-MoS2 NPs were all nanoscale particles with a layered structure. The dispersion and bactericidal properties of m-MoS2 NPs in WCFs were better than those of MoS2 NPs. The best dispersion and bactericidal properties were observed with 1 wt % MoS2 NPs, as well as friction reduction and antiwear properties. During friction, the two friction surfaces were in the boundary lubrication state,and the prepared m-MoS2 NPs entered the friction contact zone along with the WCFs. A friction chemical reaction film rich in MoS2 and Ag NPs was formed on the friction surface to fill and repair the worn surface, exerting a good lubrication effect.