Plant growth promoting rhizo and endophytic bacteria were isolated from different parts of pepper from south eastern Ethiopia. Plant growth promoting bacteria (PGP) are those that may be used to promote plant growth and suppress plant diseases. The objectives of this study were to identify and characterize PGPB indigenous to pepper rhizosphere and endophyte bacteria in Ethiopia, and to determine their capacity to suppress Phytophthora capsici in pepper. From a total of 60 isolates, 20 were selected based on their in vitro antagonism activity of phytopathogens and plant growth promoting traits. From the total 60 strains representing, 38 rhizosphere, and 22 endophytic bacteria were identified based on biochemical assays of semi-automated Vitec 2 compact and ten potential bacteria further identified by molecular methods. Results revealed that only one isolate of rhizosphere and three endophytic bacteria showed more than 50% suppression of test pathogens. The isolates were evaluated for their ability to solubilize phosphate, as well as for ammonia, indole acetic acid, hydrogen cyanide, and biofilm production. The selected isolates produced (0.2–93 µg mL− 1) of indole-3-acetic acid, without supplemented with tryptophan, while supplemented with tryptophan it produces (11.23–159 µg mL− 1). The activities of plant growth-promoting were assessed by measuring their effect on the number of lateral roots, root and shoot length of Arabidopsis plants, and germination percentage of pepper plants. Pepper plants grown from seeds that were treated with these PGPB strains showed significantly higher levels of germination, seedling vigor, and growth, compared to non-treated control plants. Since these PGPB inoculants showed multiple characters useful to the host plants, they may be used as an alternative in the production of new, safe, and effective seed treatments as bio-fungicides. Generally, this work exhibits the potential of bacterial isolates to control Phytophthora infection and promote plant growth.