Moisture and nitrogen availability are critical influencing factors for plant growth and interspecific relationships in grasslands of the loess hilly-gully region. To elucidate the effects of water and nitrogen supply on the growth, water use efficiency, and interspecific relationships of grassland dominant species in the loess hilly-gully region, and to investigate the evolutionary trends of these dominant species under drought and atmospheric nitrogen deposition scenarios, as well as their roles in grassland productivity and community stability. This study used Bothriochloa ischaemum (Poaceae), Lespedeza davurica (Fabaceae), and Artemisia stechmanniana (Asteraceae) as material under controlled pot experiments. The study set two soil water regimes (adequate water supply and drought stress) and two nitrogen treatments (0 and 0.025 g N /kg dry soil). The response characteristics of plant biomass production, water use efficiency, and the net biodiversity effect of three dominant species were studied under different plantation patterns of monoculture, two-species mixtures, and three-species mixtures. Key findings included: (1) Under drought stress, biomass production was reduced by 0.14 to 22.04 g /pot and water use efficiency was reduced by 0.21 to 3.01 g /kg. B. ischaemum exhibited a marked increase of 13.19% to 69.75% in root to shoot ratio, while L. davurica showed a substantial decrease from 29.84% to 67.55%. (2) Nitrogen application enhanced biomass production by 2.49 to 36.00 g /pot, reduced root to shoot ratios by 17.83% to 54.06%, improved water use efficiency by 0.17 to 4.25 g /kg, and increased water consumption by 0.37 to 3.82 kg /pot. (3) Mixture under drought stress demonstrated higher biomass production and water use efficiency, and its water consumption was not significantly affected by nitrogen application. (4) The net biodiversity effects were generally positive. Under drought stress with no nitrogen application and adequate water supply with nitrogen application treatments, the complementary effects were positive. The selection effect in mixtures of B. ischaemum was increased by 7.45% to 244.93% under drought stress with nitrogen application. In summary, drought stress significantly reduced the biomass, water consumption, and water use efficiency of three dominant species. However, nitrogen application and mixture effectively mitigated these adverse effects. Notably, while drought stress and nitrogen application individually enhanced species complementarity in species of mixtures, their selection effects intensified interspecific competition in mixtures of B. ischaemum. Under the background of climate change, in the construction of artificial grassland, aiming at high productivity and low water consumption, the B. ischaemum-A. stechmanniana mixture is the best choice.