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To examine biodiversity-ecosystem function relationships in alpine grasslands of the Qinghai-Tibetan Plateau, we compared differences in plant species and functional group diversity (sedges, grasses, legumes and non-leguminous forbs) to aboveground biomass, soil carbon (C) and nitrogen (N) pools and soil loss in five sites that ranged from healthy to severely degraded grasslands. Plant diversity decreased from 36 species in the healthy grassland to 15 species in the severely degraded grassland, and the plant functional groups changed from predominantly grasses and sedges to mostly forbs as the level of degradation increased. Plant biomass and soil pools of C and N decreased whereas soil loss and the amount of bare ground increased across the degradation gradient from healthy to severely degraded grasslands. Simple linear regressions showed strong positive relationships between species diversity and aboveground biomass of sedges, grasses and legumes and between soil C and N pools, but negative relationships between species diversity and non-leguminous forbs and soil loss. Our results provide strong evidence that plant diversity in grasslands on the Qinghai-Tibetan Plateau is positively related to primary productivity, C and N storage in soils and soil conservation, and that grassland degradation is impairing ecosystem function resulting in a loss in ecosystem services.