The Chinese government initiated a massive conservation program called "Grain-for-Green" in 1999 to reduce soil erosion and improve ecosystem function. Implementing practical sustainable development in the loess plateau still remains problematic, particularly in its eco-fragile areas. Here we discussed an approach for sustainable development at the watershed scale by integrating land use suitability, ecosystem services and public participation in the loess hilly area. We linked land use scenario analysis and economic modeling to compare the outcomes of three scenarios, CLU (Current Land Use), GOLU (Grain-production Oriented Land Use) and PSLU (Potential Sustainable Land Use). The results indicated that compared to PSLU, GOLU may provide a higher economic productivity in the short-term, but not in the long-term. CLU ranked lowest in terms of economic benefits and did not meet the daily needs of the local farmers. To reconcile the land use adjustments with farmers' basic needs, a labor-saving land use strategy is necessary. Since the PSLU scenario assumes that slope cropland should be converted to pastures or orchards, more time may be available for off-farm work and for more public participation in integrated ecosystem management. Financial support to the local farmers for environmental conservation should be modulated in function of their positive contribution to ecosystem management.