Root-knot nematodes (RKNs) are among the most destructive pests in protected watermelon production under continuous cropping systems. Although both pepper rotation and arbuscular mycorrhizal fungi (AMF) inoculation have shown potential for suppressing RKNs and promoting plant growth, their combined effects remain unclear. This study conducted greenhouse pot experiments using continuously cropped watermelon soil over two consecutive cycles. In the first cycle, chili pepper (Capsicum annuum) or watermelon (Citrullus lanatus) was planted, followed by watermelon cultivation in the second cycle with inoculation of Funneliformis mosseae or Glomus versiforme. Compared with continuous watermelon cropping, both rotation and AMF inoculation improved root vitality, osmotic regulation, antioxidant enzyme activities, and photosynthetic performance, thereby enhancing watermelon growth and resistance to RKNs. Among all treatments, chili pepper rotation combined with Glomus versiforme showed the best performance, increasing shoot fresh weight by 31% and reducing disease index (DI), gall index (GI), and egg mass index (EI) by 30.8%, 77.0%, and 57.1%, respectively. In addition, the populations of second-stage juveniles (J2) in soil and roots and adult females in roots decreased by 85.4%, 55.5%, and 50.8%, respectively. High-throughput sequencing results showed that the combined treatment enriched several potentially beneficial microbial taxa, including Ochrobactrum, Bacillus, Acinetobacter, and Delftia. In addition, it enriched predicted metabolic pathways that may be associated with plant growth promotion and stress tolerance. Overall, pepper rotation combined with Glomus versiforme inoculation represents a promising, environmentally friendly strategy for the management of watermelon root-knot nematode disease.