Although vertical cutoff walls can effectively contain groundwater pollution, vertical barriers constructed using conventional cement-bentonite-soil (CBS) mixtures exhibit poor permeability and produce considerable CO2 during cement production. The dredged sludge ash (DSA) has potential to be used as an eco-friendly source for vertical barriers building because of the remarkable pozzolonicity. In this study, a mixture consisting of MgO-activated dredged sludge ash (DSA) and bentonite was used to develop a low permeable MgO-activated DSA-bentonite-sand (MDBS) barrier material for application to vertical cutoff walls. The mechanical properties of MDBS and CBS mixtures were investigated and the hydration products and microstructure were examined using scanning electron microscopy equipped with energy-dispersive X-ray spectroscopy (SEM-EDS), X-ray diffraction (XRD), and mercury intrusion porosimetry (MIP). The results showed that the MDBS mixture exhibited excellent impermeability: the hydraulic conductivity of MDBS cured for 60 d reached the minimum (1.83 × 10−8 cm/s), and considerably superior to the common requirement (lower than 10−7 cm/s) for cutoff walls. The unconfined compressive strength of the MDBS cured for 60 d increased by approximately 112% compared to the samples cured for only 7 d. The hydration products in MDBS were mainly magnesium silicate hydrate and hydrotalcite, which filled the material pores more effectively than the hydration products of CBS (calcium silicate hydrate calcium hydroxide and ettringite). The hydration products, bentonite swelling, and pore size distribution determined the MDBS mechanical properties and permeability. It is verified that activated dredge sludge ash can be used as an ideal cutoff walls material instead of cement.