Integration of green chemistry principles to nanotechnology is one of the key issues in nanoscience research. There is growing need to develop environmentally benign metal nanoparticle synthesis process that do not use toxic chemicals in the synthesis protocols to avoid adverse effects in medical applications. Here, it is a report on extracellular synthesis method for the preparation of Au, Ag and Au-Ag nanoparticles in water, using the extract of Volvariella volvacea, a naturally occurring edible mushroom, as reducing and protecting agents. Gold nanoparticles of different sizes (20-150 nm) and shapes from triangular nanoprisms to nearly spherical and hexagonal are obtained by this novel method. The size and shape of gold nanoparticles are also found to depend on temperature of the extract. The silver nanoparticles are spherical with size approximately 15 nm. There is increased productivity of nanoparticles as shown by sharp and intense surface plasmon resonance bands for the nanoparticles prepared using an excess of the extract. The Au-Ag nanoparticles prepared by co-reduction has only one plasmon band due to alloying of the constituents. All the synthesized nanoparticles are found to be photoluminescent and are highly crystalline as shown by SAED and XRD patterns with fcc phase oriented along the (111) plane. FTIR measurements were carried out to identify the possible biomolecules responsible for capping and efficient stabilization of the nanoparticles. It is found that Au nanoparticles are bound to proteins through free amino groups and silver nanoparticles through the carboxylate group of the amino acid residues. The position and intensity of the emission band is found to depend on composition of the nanoparticles indicating the possible use in therapeutic applications.