Transcription factors often belong to multigene families and their individual contribution in a particular regulatory network remains difficult to assess. We identify and functionally characterize the pepper bZIP transcription factor CAbZIP1 gene isolated from pepper leaves infected with Xanthomonas campestris pv. vesicatoria. Transient expression analysis of the CAbZIP1-GFP fusion protein in Arabidopsis protoplasts revealed that the CAbZIP1 protein is localized in the nucleus. The N-terminal region of CAbZIP1 fused to the GAL4 DNA-binding domain is required to activate transcription of reporter genes in yeast. The CAbZIP1 transcripts are constitutively expressed in the pepper root and flower, but not in the leaf, stem and fruit. The CAbZIP1 gene is locally or systemically induced in pepper plants infected by either X. campestris pv. vesicatoria or Pseudomonas fluorescens. The CAbZIP1 gene is also induced by abiotic elicitors and environmental stresses. The CAbZIP1 transgenic Arabidopsis exhibits a dwarf phenotype, indicating that CAbZIP1 may be involved in plant development. The CAbZIP1 overexpression in the transgenic Arabidopsis plants confers enhanced resistance to Pseudomonas syringae pv. tomato DC3000, accompanied by expression of the AtPR-4 and AtRD29A. The transgenic plants also exhibit increased drought and salt tolerance during all growth stages. Moreover, the transgenic plants are tolerant to methyl viologen-oxidative stress. Together, these data suggest that the CAbZIP1 transcription factor function as a possible regulator in enhanced disease resistance and environmental stress tolerance.