Extreme drought events have the potential to cause dramatic changes in ecosystem structure and function, but the controls upon ecosystem stability to drought remain poorly understood. Here we used model systems of two commonly occurring, temperate grassland communities to investigate the short-term interactive effects of a simulated 100-year summer drought event, soil nitrogen (N) availability and plant species diversity (low/high) on key ecosystem processes related to carbon (C) and N cycling. Whole ecosystem CO 2 fluxes and leaching losses were recorded during drought and post-rewetting. Litter decomposition and C/N stocks in vegetation, soil and soil microbes were assessed 4 weeks after the end of drought. Experimental drought caused strong reductions in ecosystem respiration and net ecosystem CO 2 exchange, but ecosystem fluxes recovered rapidly following rewetting irrespective of N and species diversity. As expected, root C stocks and litter decomposition were adversely affected by drought across all N and plant diversity treatments. In contrast, drought increased soil water retention, organic nutrient leaching losses and soil fertility. Drought responses of above-ground vegetation C stocks varied depending on plant diversity, with greater stability of above-ground vegetation C to drought in the high versus low diversity treatment. This positive effect of high plant diversity on above-ground vegetation C stability coincided with a decrease in the stability of microbial biomass C. Unlike species diversity, soil N availability had limited effects on the stability of ecosystem processes to extreme drought. Overall, our findings indicate that extreme drought events promote post-drought soil nutrient retention and soil fertility, with cascading effects on ecosystem C fixation rates. Data on above-ground ecosystem processes underline the importance of species diversity for grassland function in a changing environment. Furthermore, our results suggest that plant-soil interactions play a key role for the short-term stability of above-ground vegetation C storage to extreme drought events. © 2011 Perspectives in Plant Ecology, Evolution and Systematics.