Serratia marcescens strain JPP1 was isolated from peanut hulls in Huai'an city, Jiangsu Province, China. Its potential to inhibit the mycelial growth of Aspergillus parasiticus and the subsequent aflatoxin production was evaluated. The strain JPP1 could produce chitinase to degrade fungal cell walls, which was the main mechanism of strain JPP1 for biocontrol. Scanning electron microscopy of fungi treated with the crude chitinase revealed abnormal morphological changes. While the strain was grown in the peanut hulls-based medium, the chitinase activity reached 7.39 units. RT-PCR analysis showed that the crude chitinase repressed the transcription of genes involved in the aflatoxin gene cluster, such as aflR, aflC (pksL1), and aflO (dmtA) genes. By visual agar plate assay and tip culture method, the strain JPP1 exhibited remarkable inhibitory effect on mycelia growth (antifungal ratio >95%) and subsequent aflatoxin production (antiaflatoxigenic ratio >98%). An in vitro assay with seed coating agent of bacterial suspension showed that strain JPP1 effectively reduced fungal growth and subsequent aflatoxin production on peanut seeds, and its antagonistic effect was superior to the common agricultural fungicide of carbendazim. These characteristics suggest that S. marcescens JPP1 strain could potentially be utilized for the biological control of phytopathogenic fungi and aflatoxin in Chinese peanut main producing areas.