The increase in nutrient availability as a consequence of elevated nitrogen (N) deposition is an important component of global environmental change. This is likely to substantially affect the functioning and provisioning of ecosystem services by drylands, where water and N are often limited. We tested mechanisms of chronic N-enrichment-induced plant species loss in a 10-year field experiment with six levels of N addition rate. Our findings on a semi-arid grassland in Inner Mongolia demonstrated that: (i) species richness (SR) declined by 16 per cent even at low levels of additional N (1.75 g N m(-2) yr(-1)), and 50-70% species were excluded from plots which received high N input (10.5-28 g N m(-2) yr(-1)); (ii) the responses of SR and above-ground biomass (AGB) to N were greater in wet years than dry years; (iii) N addition increased the inter-annual variations in AGB, reduced the drought resistance of production and hence diminished ecosystem stability; (iv) the critical threshold for chronic N-enrichment-induced reduction in SR differed between common and rare species, and increased over the time of the experiment owing to the loss of the more sensitive species. These results clearly indicate that both abundance and functional trait-based mechanisms operate simultaneously on N-induced species loss. The low initial abundance and low above-ground competitive ability may be attributable to the loss of rare species. However, shift from below-ground competition to above-ground competition and recruitment limitation are likely to be the key mechanisms for the loss of abundant species, with soil acidification being less important. Our results have important implications for understanding the impacts of N deposition and global climatic change (e.g. change in precipitation regimes) on biodiversity and ecosystem services of the Inner Mongolian grassland and beyond.