The invention relates to a medicine used for treating knee osteoarthritis, and a preparation method thereof. The medicine used for treating knee osteoarthritis is prepared from raw materials of: 25 to 35g of variegated coralbean bark, 25 to 35g of speranskia tuberculata, 25 to 35g of Japanese clubmoss herb, 20 to 30g of slenderstyle acanthopanax root-bark, 20 to 30g of Chinese clematis root and rhizome, 20 to 30g of doubleteeth angelica root, 18 to 25g of raw common monkshood mother-root, 18 to 25g of raw kusnezoff monkshood mother-root, 15 to 20g of common burreed tuber, 10 to 15 parts of frankincense, 10 to 15g of myrrh, 20 to 25g of ligusticum, 25 to 25g of argy wormwood leaf, and 100 to 150ml of rice vinegar. According to the invention, a conservative therapy with an internal-disease external-treatment theory in Chinese medical science is adopted, and the pure traditional Chinese medicine preparation is adopted, such that surgery pains and costs of western medicine are reduced. The medicine provided by the invention is not absorbed by stomach, intestines, liver or kidney, such that no toxic or side-effect is brought to human bodies, and the occurrence of sequel is avoided. With the medicine, knee osteoarthritis is not easy to reoccur.