The bidirectional communication network between the gastrointestinal tract and the central nervous system, known as the microbiota-gut-brain axis, is increasingly recognized as a critical interface for neuropsychiatric health. Psychobiotics, encompassing specific live bacterial strains, prebiotics, and targeted dietary interventions, represent a novel class of microbiome-modulating therapeutics capable of influencing mental well-being. This comprehensive review synthesises current evidence regarding the neurobiological mechanisms and clinical efficacy of psychobiotics in the context of psychiatric and neurodegenerative conditions. Commensal bacteria and psychobiotic strains synthesise essential neuroactive compounds, including gamma-aminobutyric acid, serotonin precursors, and short-chain fatty acids, which communicate with the brain via vagal, neuroendocrine, and neuroimmune pathways. Current clinical and preclinical literature demonstrates that specific taxa, particularly within the Lactobacilli and Bifidobacterium genera, can attenuate stress reactivity, reduce systemic inflammation, and regulate hypothalamic-pituitary-adrenal axis hyperactivity. Furthermore, the therapeutic modulation of ecological biomarkers, such as the Firmicutes/Bacteroidetes ratio, provides valuable insights into restoring microbial homeostasis and mitigating neuroinflammation. While preliminary trials demonstrate significant anxiolytic and antidepressant potential, widespread clinical implementation remains hindered by methodological heterogeneity. This review highlights these translational challenges, emphasizing the critical need for standardized experimental protocols, robust multi-omics profiling, and strain-specific validation. Addressing these barriers is essential for the successful integration of psychobiotics into precision psychiatry as safe, evidence-based interventions for severe mental health disorders.