Objective To investigate the therapeutic efficacy of fire needling around the knee combined with acupuncture in early and middle stages of knee osteoarthritis and to observe its effects on Hospital for Special Surgery (HSS) knee score, serum interleukin-1β (IL-1β) and matrix metalloproteinase-3 (MMP-3). Methods One hundred patients with early and middle stages of knee osteoarthritis who were diagnosed and treated in our hospital from January 2017 to January 2019 were enrolled and divided into two groups according to the random number table method, with 50 cases in each group. The control group received acupuncture treatment, while the experimental group received acupuncture treatment with fire needling around the knee. All the patients were treated continuously for 2 weeks. The HSS knee scores, clinical efficacy and safety, and serum IL-1β and MMP-3 levels were compared between the two groups. Results The function, pain, muscle strength, range of motion, knee flexion deformity, stability scores and total HSS knee score were different between the two groups and altered at different time points with distinct changing trends (P < 0.05). The overall effective rate of treatment in the experimental group was higher than that in the control group (P < 0.05). The serum IL-1β and MMP-3 levels in the experimental group were lower than those in the control group after treatment (P < 0.05). The differences of serum IL-1β and MMP-3 levels before and after the treatment in the experimental group were higher than those in the control group (P < 0.05). No adverse reaction occurred in all patients during the treatment. Conclusion The combination of fire needling around the knee and acupuncture is safe and reliable for the treatment of early and middle stages of knee osteoarthritis. It can not only relieve symptoms, but improve knee function and clinical efficacy. The mechanism may be related to the regulation of IL-1β and MMP-3 levels.