Glycylglycine functionalized water-dispersible gold nanoparticles (AuNPs) were prepared andcharacterized on the basis of ultraviolet and visible spectroscopy (UV-vis), Fourier transform infrared (FTIR),dynamic light scattering (DLS), transmission electron microscope (TEM) and energy dispersive X-ray (EDX)analysis. The AuNPs exhibited a strong SPR band at 522 nm, which after functionalization with glycylglycine,appeared at 525 nm. This SPR band of the functionalized nanoparticles is used as a tool for thedetection of toxic metal ions in water. A large number of metal ions were tested, among which Hg²⁺, Pb²⁺,and Cr²⁺ exhibited distinct colour change, detectable with bare eye, and substantial UV-vis spectral change.TEM images and EDX analysis suggested that the colour change is due to metal-induced aggregation of thefunctionalized nanoparticles due to inter-particle plasmon coupling. The aggregation, which resulted in anincrease in particle size, is further confirmed by DLS measurement. A mechanism of metal-induced aggregationis also proposed. The present study is an example of a simple methodology to prepare water-dispersiblefunctionalized nanoparticle for colorimetric detection of toxic heavy metal ions such as Cr²⁺, Pb²⁺,and Hg²⁺ with high sensitivity.