Species and functional diversity reflect the changes in composition and functions of grassland plant communities. However, the key factors affecting species and functional diversity of desert grasslands are still controversial. To reveal the effects of stocking rate and precipitation on species and functional diversity, a survey was conducted in Stipa breviflora desert steppe. The results indicate that: (1) increasing precipitation significantly enhanced the species diversity and there was a significant positive correlation between precipitation and community characteristics (P<0.01), but it had a negative impact on functional diversity (P<0.01), (2) there were significant negative correlations (P<0.01) and no correlation (path coefficients of -0.17 and -0.15, respectively, P>0.05) between stocking rate and plant community characteristics, species diversity, and functional diversity, and increased stocking rates will reduce the species and functional diversity, and (3) the significant positive linear regression relationships were found between Rao’s quadratic entropy index and species diversity (P<0.01), as well as the relationship of functional evenness index and Pielou’s evenness index (P<0.01), and there was a power-law relationship between functional richness index and species diversity (P<0.01). In summary, the changes of species and functional diversity are comprehensively affected by precipitation, stocking rate, and community characteristics in desert grassland. Our study illustrates the importance of precipitation and stocking rates to the health and sustainability in grassland ecosystems.