Arbuscular mycorrhizal fungi (AMF) have the potential to maintain the sustainability of rice cultivation via maintaining soil health. The objective of this study was to produce an AMF-based biofertilizer for the rice variety Bg350 using indigenous dominant species of AMF that are adapted to paddy wetland soil conditions in dry, wet, and intermediate zones in Sri Lanka and are co-inoculated with the bacterium Azospirillum. A pot experiment was carried out to evaluate the effectiveness of the produced biofertilizer using the rice variety Bg350. Treatments were inorganic fertilizer, compost, biochar, produced AMF-biofertilizer [1 kg of ground carrier material inoculated with 50 g of AMF propagules and 20 mL of 1.5 × 108 (CFU/mL) of Azospirillum], and the control. A two-factor factorial, completely randomized design was used under sterilized and non-sterilized soil conditions with four replicates. The genera Glomus, Claroideoglomus, and Aculospora were identified as the most common AMFs in paddy soil in all investigated sites. In the 9th week of sampling, AMF root colonization was positively correlated (p = 0.028) with spore density. In Sri Lanka, for the first time, the highest AMF colonization rates in rice were recorded at 36.40% in the roots of the Bg350 from the Gampaha district. AMF root colonization increased over sampling time and was different according to the interactive effect of fertilizer application and soil condition. The biometric parameters and yield-attributing characteristics were significantly higher in the rice plants grown in sterilized soil, independent of the tested treatments. The number of grains per panicle was significantly similar (p ≤ 0.05) in the compost, AMF-biofertilizer, and inorganic fertilizer added treatments. It can be concluded that application of paddy soil adapted AMF species as a biofertilizer increased rice plant growth, productivity, and yield.