Several rhizobacteria play a vital role in plant protection, plant growth promotion and the improvement of soil health. In this study, we have isolated a strain of Lysobacter antibioticus HS124 from rhizosphere and demonstrate its antifungal activity against various pathogens including Phytophthora capsici, a destructive pathogen of pepper plants. L. antibioticus HS124 produced lytic enzymes such as chitinase, beta-1,3-glucanase, lipase, protease, and an antibiotic compound. This antibiotic compound was purified by diaion HP-20, silica gel, sephadex LH-20 column chromatography and high performance liquid chromatography. The purified compound was identified as 4-hydroxyphenylacetic acid by gas chromatography-electron ionization (GC-EI) and gas chromatography-chemical ionization (GC-CI) mass spectrometry. This antibiotic exhibited destructive activity toward P. capsici hyphae. In vivo experiments utilizing green house grown pepper plants demonstrated the protective effect of L. antibioticus HS124 against P. capsici. The growth of pepper plants treated with L. antibioticus culture was enhanced, resulting in greater protection from fungal disease. Optimum growth and protection was found when cultures were grown in presence of Fe(III). Additionally, the activities of pathogenesis-related proteins such as chitinase and beta-1,3-glucanase decreased in roots, but increased in leaves with time after treatment compared to controls. Our results demonstrate L. antibioticus HS124 as a promising candidate for biocontrol of P. capsici in pepper plants.