Among the different value added uses of mushroom, vegetative mycelia of Pleurotus ostreatus can be explored as a bio-inoculant for sustainable agriculture use. From three fruit-bodies of Pleurotus ostreatus, tissue cultures were established, were used for DNA preparation and biochemical tests. Phylogenetic analysis using three SSU-ITS-LSU markers indicated that the species Pleurotus ostreatus occupies a separate clade. Ability of the isolates to synthesis indole acetic acid (39.66–48.33 μg/ml), siderophore (hydroxamate and phenolate types) and enzymes like chitinase, protease and lipase had promoted us to apply them as bio-inoculant for plant growth promotion and against fungal pathogens. In dual culture assay, P. ostreatus isolates inhibited growth of Fusarium oxysporum SF1404 (44.4–66.5 % inhibition) and Alternaria solani TD3 (44.4–55.5 % inhibition). The mycelia culture of the fast-growing isolate (KUFC113) was applied on rhizosphere of pepper plant to protect against wilt causing F. oxysporum, and it was observed that the pathogen did not exhibit any wilting symptom. Assay of the stress enzymes (ascorbic acid peroxidase, catalase, peroxidase, and polyphenol oxidase), flavonoid, phenol content also supported that treatment of the mushroom culture could ameliorate the biotic stress in the plants. The mycelia of P. ostreatus colonized on the rhizosphere of pepper plant and influenced the growth by improving plant biomass, chlorophyll and metabolite contents. The principal component analysis and Pearson's correlation matrix showed correlation among the growth parameters of pepper plants.