This paper examines local government capability in managing pre-, during and post-natural disaster in Indonesia. The case study is the Bantul local government which had experience in managing the 2006 earthquake. Bantul is located in the most densely populated area of Java, where 1,500 people per square km square, and the earthquake destroyed domestic industries that had become the main resource of the Bantul local government. The capability of local government and the requirement to manage a disaster are very important issues for exploring the important role of local government in mitigation, preparedness, response and recovery disaster management activities, particularly in regard to the characteristics of local government in developing countries. In this paper, capability of local government in managing a disaster is defined as a function of institutions, human resources, policy for effective implementation, financial, technical resources and leadership. The capability requirement of each stage of disaster management has also been explained from the point of view of state and non-state actors and institutions. Finally, the paper integrates the capability requirement and reality in order to bridge these gaps.