The average annual precipitation in the hilly area of the Loess Plateau in northwest China is low, and evaporation is high. The concentrated seasonal precipitation easily causes soil and water loss, and the water and nutrient deficit has become an important factor limiting the healthy and sustainable development of grasslands in this region. Fertilization is one of the most important technical measures to improve degraded grasslands and increase forage productivity. Super absorbent polymer (SAP) is a kind of high-molecular polymer with rapid water absorption and slow water release characteristics. It can reduce ineffective water evaporation and soil nutrient loss, and play an important role in improving soil physical and chemical properties. To assess the effects of water retention and fertilization measures on plant community characteristics and diversity in loess hilly grasslands, different levels of super absorbent polymer (SAP), nitrogen and phosphorus (NP) fertilizers (SAP: 45, 60 kg/hm² and NP: 150 kg/hm² urea+300 kg/hm² calcium superphosphate, 250 kg/hm² urea+400 kg/hm² calcium superphosphate) were set in the hilly grassland of Anding District of Dingxi City to investigate the effects of different application rates of SAP and NP fertilizers alone or in combination on soil water content, community characteristics and species diversity in loess hilly grassland. After two years of comparative field study, it can be seen that: (1) Individual application of 45 kg/hm² SAP (T1) significantly increased soil water content, importance value of legumes, aboveground biomass, and contributed to the improvement of grassland biomass and plant diversity; (2) The treatment of SAP combined with NP (T7:45 kg/hm² SAP+250 kg/hm² N+400 kg/hm² P) or NP fertilizer alone (T3: 150 kg/hm² N+300 kg/hm² P) could significantly increase the importance values and biomass of Asteraceae, plant canopy height, vegetation coverage, above and below ground biomass of the community; (3) The Simpson index, Shannon-Wiener index and Pielou index decreased in the treatment of NP fertilizer or NP fertilizer combined with SAP, except for T8 (45 kg/hm² SAP+150 kg/hm² N+300 kg/hm² P). The interaction of nitrogen and phosphorus additions and SAP may increase canopy height and community coverage, increase competition among plant communities, inhibit the growth of understory plants and subject them to light limitation, and ultimately lead to a reduction in species diversity. In conclusion, the application of moderate amounts of SAP alone is beneficial in maintaining grassland diversity while maintaining slow productivity growth, and the combination of SAP with NP fertilizer significantly increases the biomass of Asteraceae and Gramineae, which in turn increases the community biomass, but leads to a reduction in plant diversity.