The cellulose-based hydrogel has been widely applied for soil water retention and nutrient release agents for several decades. Embedding the inorganic materials into hydrogels is an excellent strategy to improve the inherent limits of the cellulose-based hydrogel. Notably, municipal sludge-derived hydrochar (HC) has reduced the environmental burden and offered a potential hydrogel carrier to control water-retention and nutrient-release. However, the above function for plant growth of hydrochar-embedded carboxymethyl cellulose-g-poly(acrylic acid) (CMC-g-PAA/HC) is unknown, and relevant reports are lacking. This study investigated the water retention, nutrient release behavior, and effect of germination and plant growth of CMC-g-PAA/HC hydrogel. Characterization results showed that HC was successfully incorporated into CMC-g-PAA/HC with 6.0% higher thermostability, 7.2–21.0% lower swelling ratio (SR) in water, and substantial SR in phosphate solution (P-solution). The water loss rate of CMC-g-PAA/HC in P-solution or water owned a more significant temperature response (7.9–15.0 folds) than CMC-g-PAA (8.2–10.0 folds). Moreover, 4.0% higher n value and more 18.5% released P for CMC-g-PAA/HC were also observed. These phenomena were due to restricting the polymer chains movement and the water molecules diffusion inside the hydrogels with HC. Phytotoxicity assessments showed that HC in CMC-g-PAA/HC could effectively alleviate the inhibition effects on rape germination retained with 78.3% germination vigor and 80.0% germination ratio, even dramatically improved plant growth to 28 d. The results of this study demonstrated a new route for developing eco-friendly CMC-g-PAA/HC hydrogel, advantageous as a water retention agent and nutrient carrier in arid and semiarid regions.