To reach the ecosystem health from both ecological and economic points is the objective of water conservation and ecological building in the loess hilly area under erosion environment. On the principle of ecosystem healthy quantitative assessment and diagnosis index selecting, 17 factors were selected and evaluation index system was established to make ecosystem health assessment from the following three aspects: resource and environmental capacity, social and economic impact, and ecological services in a small watershed under erosion environment. The mean-square deviation decision method was employed to determine the weight of each factor and then the step-up multilayer synthesis with liner weighting function method was used to build two-level hierarchy and collecting index health consultation model-health index. The health dynamics of eco-economy system in the small watershed under erosion environment was analyzed. It was shown that the watershed ecosystem is relatively stable and the health index has an increasing trend from annual fluctuation (0.370 in 1985 to 0.573 in 2003). This indicates that it has a quite strong ability on sustainable development. At the same time, the obstacle and advantage to the watershed ecosystem health were studied by introducing the concepts of obstacle degree and advantage, and path analysis method, with considering the real eco-economic optimal level as the uppermost goal. Finally, suggestions on ecological building were provided which give a scientific basis to the ecosystem rehabilitation in the small watershed.