This randomized controlled trial examined the psychological, physical, and neurophysiological effects of a qigong exercise program on depressed elders with chronic medical illness. The experimental group (n = 21, 80 ± 7 years) was given a 12-week qigong exercise program, while the comparison group (n = 17, 81 ± 8 years) participated in a newspaper reading program with the same duration and frequency. Measurement of depression symptoms, psychosocial functioning, muscle strengths, salivary cortisol, and serum serotonin was conducted. At 12 weeks, the qigong group had significant reduction in depressive symptoms (F = 11.68; p < 0.025). Improvement in self-efficacy (F = 4.30; p < 0.050), self-concept of physical well-being (F = 6.82; p < 0.025), and right-hand grip strength (F = 5.25; p = 0.034) was also found when compared with the comparison group. A change in salivary cortisol level was found marginally insignificant between groups (F = 3.16; p = 0.087). However, a decreasing trend of cortisol level was observed. The results provided preliminary evidence for the hypotheses that the antidepressive effect of qigong exercise could be explained by improvement in psychosocial functioning and possibly down-regulation of hyperactivity of the hypothalamic-pituitary-adrenal axis.