Engineering sediment waste increases enormously with the massive utilization of underground space, which accounts for nearly 60% of the total construction and demolition waste in China. Currently, most of engineering sediment waste is transported to landfills for disposal, occupying large land resources and posing safety concern due to its excessive accumulation. Therefore, a novel and green recycling approach is urgent. Here, the engineering sediment waste was recycled with mechanical treatment and calcination, and used as supplementary cementitious material to partially substitute cement to prepare mortar for construction application. The mechanical properties of the prepared mortar were investigated, and the mechanism behind the proposed recycling approach was revealed through microscale characterizations. Results show that recycled engineering sediment can promote the secondary hydration in mortar, improving the compressive strength. The environmental impact of the proposed recycling approach and current landfilling method was compared through life cycle assessment (LCA). The proposed recycling method can save 1204.1 MJ/t of energy consumption, and 326.1 kg CO2eq/t of global warming potential compared to those of landfilling method. Furthermore, the multi-criteria analysis was adopted to evaluate the overall mechanical, environmental, and economic performance of mortar with recycled engineering sediment. The mortar containing recycled engineering sediment exhibits the best overall performance including mechanical properties, environmental and economic benefits among mortar prepared with various supplementary cementitious materials. Such findings provide an effective recycling scheme of engineering sediment waste on a vast scale and contribute to a sustainable construction waste management strategy.