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The present study highlights the effects of sheep grazing and precipitation on herbage and animal performance in a grazed steppe of Inner Mongolia. Experimental data were collected during grazing periods of four consecutive years (2005–2008), and effects were analysed across a gradient of seven grazing intensities. Variation in annual precipitation, reflected by the effect of ‘year’, was the major factor affecting herbage; i.e., the production and nutritive value of herbage increased with increasing precipitation. Herbage parameters were also affected by grazing intensity, as herbage production (HP) and herbage nutritive yields decreased, while herbage nutritive values increased with increasing grazing intensity. The grazing-induced decrease in herbage nutritive yields suggests that decreases in HP offset the positive effect of grazing on the nutritive value. Liveweight gain (LWG) was predominantly affected by grazing intensity, as LWG per sheep and per ha decreased and increased, respectively, with increasing grazing intensity. However, responses varied among years: LWG per sheep was maximized by light grazing in the drought year and by moderate grazing the wet year. Our results showed that herbage shortage at high grazing intensities reduces LWG per sheep and thus diminishes responses in LWG per ha. Nevertheless, the highest grazing intensity provides highest animal production per ha in the short term; however, this is not sustainable in the mid- and long term because decreasing HP induces degradation processes. Based on our results, a reduction in grazing intensity that still provides 78% of the maximum LWG per ha meets the requirements of a sustainable grazing management.