Mycoremediation, the biotechnological application of fungi for the removal, degradation, or immobilization of environmental pollutants, has emerged as a sustainable alternative to conventional remediation technologies. Fungi possess unique enzymatic systems, particularly ligninolytic enzymes such as laccases, manganese peroxidases, and lignin peroxidases, that enable the breakdown of structurally diverse contaminants, including hydrocarbons, pesticides, dyes, pharmaceuticals, mycotoxins, and heavy metals. Their filamentous growth and extensive mycelial networks enhance pollutant accessibility in soil micropores, while their metabolic versatility ensures survival under extreme environmental conditions. Compared with chemical and physical methods, mycoremediation is cost-effective, eco-friendly, and capable of providing dual benefits of contaminant removal and ecological restoration. Recent advancements include the use of agricultural residues as low-cost substrates to promote circular bioeconomy, genetic engineering of fungi to enhance degradation efficiency, and integration with bacterial, algal, or plant-based systems for synergistic remediation. Despite its potential, challenges, such as large-scale implementation, field-level consistency, and regulatory frameworks, remain. This review highlights the principles, mechanisms, applications, benefits, and limitations of mycoremediation while discussing recent innovations and future prospects. Overall, mycoremediation holds great promise as a green, versatile, and sustainable technology for addressing global environmental pollution challenges.