The plant growth is generally co-limited by water and nitrogen (N) in desert ecosystems. Increasing global N deposition necessitates to evaluate the response of desert plant seedlings against variable N and water input levels. As it will affect the success of the degraded vegetation restoration and reconstruction. A two-year pot experiment was conducted to examine the effects of water addition (drought, moderate water level, and high water level), N addition (no N, low level with 51 mg/kg, moderate level with 102 mg/kg, and high level with 306 mg/kg) and their interaction on seedlings of Alhagi sparsifolia at the southern rim of the Tarim Basin. We analyzed the effects of water and N addition on the dry matter accumulation, biological N fixation, and N efficiency of A. sparsifolia seedlings. The results showed that the effects of water and N additions on dry matter accumulation and N absorption efficiency of different organs varied by years, but whole seedlings showed the similar trend in both years. Under drought treatment, low N addition significantly improved the dry mass, N absorption efficiency and biological N fixation amount of A. sparsifolia seedlings, but all these decreased with the increasing N rate. Interaction of water and N increased the dry mass, N absorption efficiency, and biological N fixation amount of A. sparsifolia seedlings. Among all the treatments, the moderate water and N (102 mg/kg) was the best combination to improve the dry matter accumulation, N absorption efficiency and biological N fixation amount. Water and N additions tended to reduce the N use efficiency (NUE). However, N addition significantly enhanced the biological N fixation ratio under drought and moderate water conditions. A significantly negative relationship occurred between the NUE and biological N fixation ratio only in the second year. The dry mass was significantly positively related with N absorption efficiency and biological N fixation amount, except NUE and biological N fixation ratio. It suggested that A. sparsifolia seedlings could adjust their N absorption efficiency and biological N fixation amount to adapt changing water and N additions, and it could further affect the dry matter accumulation of seedlings.