Green route for silver nanoparticle synthesis has gained increasing attention. Cyanobacteria are one of the promising organisms to produce a number of secondary metabolites that are capable of reducing silver ions to small-sized silver nanoparticles. In the present study, we employed an aqueous extract of the cyanobacterium Haloleptolyngbya alcalis KR2005/106 isolated from a soda lake for biosynthesis of silver nanoparticles (AgNPs). The extract acted as a reducing agent for AgNPs synthesis and resulted formation of nanoparticles < 50 nm in size. In this study, synthesis of AgNPs obtained only in the sample exposed to photosynthetically active radiation (PAR) while the synthesis of AgNPs was not observed in the samples kept in dark. The biogenic fabrication of AgNPs was carried out by optimizing several governing parameters such as concentration of the silver nitrate solution, pH, temperature, and amount of biomass. Results obtained through different analytical techniques revealed that cyanobacterial taxon H. alcalis isolated from saline-alkaline habitat is a potential candidate for biosynthesis of optimum-sized spherical AgNPs. Surface plasmon resonance (SPR) property of AgNPs was exploited for aqueous ammonia sensing and revealed that AgNPs synthesized using aqueous extract of cyanobacterium H. alcalis could be employed for colorimetric detection of dissolved ammonia for monitoring quality of water.