An example method for distributed service chaining in a network environment is provided and includes receiving a packet belonging to a service chain in a distributed virtual switch (DVS) network environment, wherein the packet includes a network service header (NSH) indicating a service path identifier identifying the service chain and a location of the packet on the service chain, evaluating a service forwarding table to determine a next service node based on the service path identifier and the location, with a plurality of different forwarding tables distributed across the DVS at a corresponding plurality of virtual Ethernet Modules (VEMs) associated with respective service nodes in the service chain, and forwarding the packet to the next service node, with substantially all services in the service chain provided sequentially to the packet in a single service loop on a service overlay.