The increasing demand for environmentally sustainable construction materials has accelerated the development of bio-based composites derived from renewable agricultural residues. In this study presents the fabrication and comprehensive characterization of fungal mycelium composite blocks produced from sugarcane bagasse reinforced with Pleurotus ostreatus mycelium for green material engineering applications. Sugarcane bagasse fibres (1–5 mm) were cleaned, dried, milled, and supplemented with 5–10 wt.% wheat bran before adjusting the moisture content to 60–65%. The prepared substrate was sterilized at 100 °C for 1 h, inoculated with 10–15 wt.% P. ostreatus grain spawn, compacted into acrylic moulds, and incubated under controlled conditions (25–28 °C, 70–85% relative humidity) for 30 days. The fully colonized composites were thermally deactivated at 60–80 °C for 24–48 h and subsequently evaluated for their mechanical, physical, thermal, and biodegradation performance. The developed composites exhibited a maximum compressive strength of 0.25 MPa, flexural strength of 0.85 MPa, and tensile strength of 0.42 MPa, demonstrating adequate mechanical integrity for non-structural applications. Density values ranged from 0.20 to 0.32 g/cm³ with moderate dimensional shrinkage and near-neutral pH, indicating structural stability. Thermal conductivity values of 0.078–0.085 W/m·K confirmed excellent insulation characteristics, while thermogravimetric analysis revealed satisfactory thermal stability. Water absorption tests demonstrated the hydrophilic and biodegradable nature of the composites, highlighting their environmental compatibility. Overall, the developed mycelium-based composites provide a lightweight, renewable, and sustainable alternative to conventional synthetic building boards, offering significant potential for insulation panels, interior partition systems, eco-friendly packaging, and other non-load-bearing building applications.