Toxicity of silver nanoparticles (Ag NPs) has been reported both in vitro and in vivo. However, the intracellular stability and chemical state of Ag NPs are still not very well studied. In this work, we systematically investigated the cellular uptake pathways, intracellular dissolution and chemical species, and cytotoxicity of Ag NPs (15.9 ± 7.6 nm) in Chinese hamster ovary cell subclone K1 cells, a cell line recommended by the OECD for genotoxicity studies. Quantification of intracellular nanoparticle uptake and ion release was performed through inductively coupled plasma mass spectrometry. X-ray absorption near-edge structure (XANES) was employed to assess the chemical state of intracellular silver. The toxic potential of Ag NPs and Ag+ was evaluated by cell viability, reactive oxygen species (ROS) production and live–dead cell staining. The results suggest that cellular uptake of Ag NPs involves lipid-raft-mediated endocytosis and energy-independent diffusion. The degradation study shows that Ag NPs taken up into cells dissolved quickly and XANES results directly indicated that the internalized Ag was oxidized to Ag−O− species and then stabilized in silver−sulfur (Ag−S−) bonds within the cells. Subsequent cytotoxicity studies show that Ag NPs decrease cell viability and increase ROS production. Pre-incubation with N-acetyl-l-cysteine, an efficient antioxidant and Ag+ chelator, diminished the cytotoxicity caused by Ag NPs or Ag+ exposure. Our study suggests that the cytotoxicity mechanism of Ag NPs is related to the intracellular release of silver ions, followed by their binding to SH-groups, presumably coming from amino acids or proteins, and affecting protein functions and the antioxidant defense system of cells.