Peanut root rot, caused by Fusarium spp., is a devastating fungal disease. As part of a program to obtain a biocontrol agent to control peanut root rot in the field, a bacterial strain LY-1 capable of inhibiting the growth of the fungus in vitro was isolated from rhizosphere soil samples collected from wild mint by agar disk dilution and dual-culture assay. Strain LY-1 was identified as Bacillus subtilis based on morphological characteristics, 16S rDNA, and gyrA sequence analyses. The bacterial suspension and cell-free culture filtrate of LY-1 could significantly inhibit the growth of Fusarium oxysporum, Fusarium proliferatum and Fusarium solani, but volatile organic compounds from the cultures had only a weak effect on mycelial growth. The percentage inhibition of 20% concentration of the cell-free culture filtrate of LY-1 on conidium production of each of the three Fusarium species was greater than 72.38%, and the percentage inhibition by the culture filtration on the germination of conidia of the three species was at least 62.37%. The production of extracellular enzyme activity by LY-1 was studied in functional assays, showing protease, cellulase, amylase, chitinase, and β-1,3-glucanase activity, while LY-1 contained a gene encoding iturin, an antifungal lipopeptide. In addition, under pot culture in a greenhouse, culture filtrate of LY-1 significantly promoted the growth of peanut, increasing the fresh and dry mass of the plant by 30.77% and 27.27%, respectively, in comparison with the no-filtrate control. The culture filtrate of LY-1 increased the resistance of peanut plants to F. oxysporum, with the biocontrol efficiency reaching 44.71%. In conclusion, B. subtilis LY-1, a plant-growth-promoting rhizobacterium, was able to protect peanuts from Fusarium spp. infection.