In agricultural production, sustainability is currently one of the most significant concerns. The genetic modification of plant growth-promoting rhizobacteria may provide a novel way to use natural bacteria as microbial inoculants. In this study, the root-colonizing strain Pseudomonas protegens Pf-5 was genetically modified to act as a biocontrol agent and biofertilizer with biological nitrogen fixation activity. Genetic inactivation of retS enhanced the production of 2,4-diacetylphloroglucinol, which contributed for the enhanced antifungal activity. Then, the entire nitrogenase island with native promoter from Pseudomonas stutzeri DSM4166 was introduced into a retS mutant strain for expression. Root colonization patterns assessed via confocal laser scanning microscopy confirmed that GFP-tagged bacterial were mainly located on root surfaces and at the junctions between epidermal root cells. Moreover, under pathogen and N-limited double treatment conditions, the fresh weights of seedlings inoculated with the recombinant retS mutant-nif strain were increased compared with those of the control. In conclusion, this study has innovatively developed an eco-friendly alternative to the agrochemicals that will benefit global plant production significantly.