This study was conducted explore the evolution of land cover and biodiversity function in the Loess Hilly Region, evaluate the optimal habitat under the perspective of biodiversity conservation, using Pengyang County of Ningxia as the research area, by using Landsat TM images of every 5 years from 1995 to 2015 as the basic data. The 3S technology was used to integrate the characteristics of spatio-temporal dynamics of land cover. From June to August of 2012 and 2013, sample data of ground beetles were collected in 6 different habitats, such as mixed forestland of shrub and grass and mixed forestland of arbor and shrub using the trapping method. The biodiversity function was evaluated using the InVEST-Habitat Quality model, and the best habitat was explored using sampling data. Moreover, land cover and biodiversity function in 2020 were predicted using the CA-Markov model. The result showed that: (1) The land cover and biological diversity of Pengyang County changed significantly from 1995 to 2015, unused land area decreased, urban land rapidly expanded, and natural enclosed grassland and horizontal farmland in the habitat clearly changed; biodiversity function transformed from degradation to optimization during the study period, from which the best biodiversity function was observed in 2015. (2) Compared to 2015, we predicted that the horizontal farmland and urban land of land cover significantly changed in 2020 and the biodiversity function rapidly improved. (3) The mixed forestland of shrub and grass was the best habitat for biodiversity conservation of Pengyang County. The traditional "88542" horizontal ditch of land preparation measure in the habitat may be the best model for ecological restoration in the local area. (4) We observed good universality and high accuracy by utilizing the InVEST model and CA-Markov model, respectively; The implementation and construction of not only soil and water conservation projects, including horizontal ditch, fish scale pit, and "88542", but also ecological restoration strategies such as returning farmland to forest and grass and ecological function zoning are very important and will show remarkable results.