The collar rot disease caused by the soil-borne fungus Sclerotium rolfsii (Sacc.) is a major constraint of chili (Capsicum annum L.) production in Pakistan. Considering the fact that biological control has low efficacy in field conditions, their encapsulation into biopolymers like alginate meets the essential criteria for bacteria viability, effectiveness, shelf life, stability, and controlled release. The current research was conducted to develop stable alginate beads of biocontrol bacteria (Ochrobactrum ciceri) and to check their efficacy in managing collar rot disease in C. annum. In vitro, antifungal bioassays indicated that increasing concentrations (16, 24, and 64%) of culture filtrate or the cell pellets significantly decreased fungal growth and enzyme activity (catalase: CAT, peroxidase: POX, polyphenol oxidase: PPO, and phenylalanine ammonia-lyase: PAL), hence increased offshoots hyphae, and caused distortion in sclerotia and hyphae. O. ciceri successfully developed stable alginate beads (AlgB-OC) as indicated by FTIR analysis, encapsulation efficiency (91.15%), moisture content (99.19%), swelling ratio (130%), particle size (wet: 2.11 mm; dry: 1.15 mm), film-forming time (48 h), and slow-release of entrapped bacteria till 30 days. AlgB-OC exhibited 76% antifungal potential in vitro and managed 70% of the collar rot disease in vivo. Moreover, the application of AlgB-OC significantly improved plant growth (length and biomass) and physio-chemical attributes (photosynthetic pigments, total protein content, activity of CAT, POX, PPO, and PAL), along with more lignin, phenolics, gel, and starch accumulation in roots. Multivariate analysis based on a total of 13 morpho-physiological indices of chili plants also identified AlgB-OC as the most effective treatment for disease management. It was concluded that the formulation of O. ciceri into alginate could be an effective alternative for managing collar rot disease in chili plants and obtaining better plant growth.