The saprotrophic fungus Phlebiopsis gigantea has been used for several years as a biocontrol agent against the conifer pathogen Heterobasidion annosum. Although the effectiveness of P. gigantea in biocontrol has been shown empirically, the long-term effect on living conifer trees as well as the mechanism underlying its antagonistic activity is still unknown. An additional concern is the potential of P. gigantea to acquire a necrotrophic habit through adaptation to living wood tissues. By using a combination of histochemical, molecular and transcript profiling (454 sequencing), we investigated under in vitro conditions the necrotrophic capability of P. gigantea and induced localized resistance as a mechanism for its biocontrol action. Pinus sylvestris seedlings (10 years old) were challenged on the xylem surface with P. gigantea or H. annosum. Both fungi provoked strong necrotic lesions, but after prolonged incubation, P. gigantea lesions shrank and ceased to expand further. Tree seedlings pre-treated with P. gigantea further restricted H. annosum-induced necrosis and had more lignified cells. The 454 sequencing revealed elevated transcript levels of genes important for lignification, cell death regulation and jasmonic acid signalling. The results suggest that induced localized resistance is a contributory factor for the biocontrol efficacy of P. gigantea, and it has a limited necrotrophic capability compared with H. annosum.