The paper presents the first study to date on selective label-free biosensing with a microcavity in-line Mach-Zehnder interferometer induced in an optical fiber. The sensing structures were fabricated in a single-mode fiber by femtosecond laser micromachining. In contrast to other studies of this sensing scheme, where only the sensitivity to refractive index changes in the cavity was investigated, this research used chemical surface treatment of the sensor to ensure detection specificity. Immobilized MS2 bacteriophages were applied as recognition elements specifically targeting live E. coli C3000 bacteria. It is shown that the sensor allows for real-time monitoring of biological phenomena taking place on the surface of the microcavity. The developed biosensor exhibits ultrahigh refractive index sensitivity of 15,000 nm/RIU and is capable of detecting live E. coli bacteria concentrations as low as 100 colony forming units (CFU)/mL in liquid volume as low as picoliters.