Rice sheath blight caused by Rhizoctonia solani is a devastating global rice disease. This study aimed to isolate biocontrol bacteria from the medicinal plant Bletilla striata for managing the disease. Strain A1 demonstrated the strongest antagonistic activity, with a 91.92% inhibition rate against R. solani in vitro. It also exhibited a broad antifungal spectrum against ten plant pathogenic fungi. Morphological and molecular (16S rRNA and recA genes) analysis identified strain A1 as Pseudomonas koreensis. In detached leaf assays, lesion length was significantly reduced. Pot and field trials showed control efficacies of 65.54% and 72.53%, respectively, comparable to the chemical agent Jinggangmycin. Strain A1 secreted extracellular enzymes (protease, β-1,3-glucanase), siderophores, and auxin (IAA), and possessed phosphate-solubilizing and nitrogen-fixing capabilities. The strain significantly enhanced the activities of key defense enzymes (POD, PAL, PPO, CAT, SOD) in rice. Furthermore, both its sterile culture filtrate and the corresponding crude ethyl acetate extract exhibited strong, direct suppression of R. solani growth. LC-MS analysis identified potential antifungal compounds, including Pseudomonic Acid, Artemisinin, and Tetradecane, in the extract. In conclusion, P. koreensis A1 is a promising biocontrol and plant growth-promoting candidate for sustainable management of rice sheath blight.