The Loess Plateau hilly and gully region represents a critical zone for soil erosion control and ecological restoration in China. Investigating land use changes, ecosystem services, and their driving factors in small watersheds under varying ecological restoration models is essential for formulating precise management strategies to achieve sustainable ecosystem management. Focusing on the ecological benefits of terracing and the the Grain for Green Program, this study selected the Guanchuan River Basin, a secondary tributary of the Yellow River, as a case study. Four representative watershed types—grassland-dominated, terraced-dominated, forested-dominated, and mixed (forest-terrace-grassland)—were analyzed using high-resolution remote sensing data combined with meteorological, topographic, soil, and population datasets. Using the CASA, InVEST, and Geodetector models, the study evaluated land use changes, ecosystem services (soil conservation (SC), water yield (WY), and carbon sequestration (NPP)), and their driving factors from 2010 to 2020. The findings reveal: (1) Land use changes across different watersheds exhibited a dual trend of “increased fragmentation” and “enhanced diversity”, characterized by expansion of water bodies, irrigated land, and construction areas. The reduction of grasslands has driven terrace cultivation, while the conversion of sparse forests significantly promoted forest expansion. (2) All ecosystem services exhibited an overall upward trend: SC in forested-dominated watersheds showed the most significant growth (14.01t hm-2 a-1), while WY and NPP in mixed watersheds experienced the highest increases (2.73mm/a and 22.63g C m-2 a-1, respectively). (3) Univariate drivers analysis indicated that NPP in grassland-dominated and mixed watersheds was mainly driven by vegetation coverage, whereas land use type emerged as the key driver in terraced-dominated and forested-dominated watersheds. SC was predominantly influenced by elevation in grassland-dominated watersheds, by slope in terraced-dominated and forested-dominated watersheds, and by solar radiation and precipitation in mixed watersheds. WY in terraced-dominated watersheds was strongly determined by land use, while in other watersheds it was controlled by precipitation. (4) Bivariate interaction analysis showed that the synergistic effects between land use type, vegetation coverage, meteorological, and topographic factors significantly enhanced the quantitative explanatory power for spatial variations in ecosystem services compared to individual drivers. In summary, this research underscored the spatiotemporal complexity and heterogeneity of land use change and ecosystem services under different ecological restoration models in the Loess Plateau hilly and gully region, highlighting the critical role of multiple factors in shaping underlying surface characteristics and ecosystem services. These findings provide a robust scientific foundation for ecological restoration and multi-objective sustainable land management efforts in ecologically fragile regions.