Owens Valley, California, USA, is an important source of water for the city of Los Angeles; however, recent studies have documented losses of grass cover coinciding with decreased watertable depths in many locations. These changes in community composition are assumed to be associated with shallower rooting depths and greater vulnerability to declining watertable depths in grasses compared to neighbouring shrubs. However, the hydraulic properties and water stress resistance of most species in Owens Valley have not been measured. In addition, the relationships between groundwater depth and other aspects of ecosystem function such as nutrient cycling are not well understood. In this study, we measured grass and shrub cover, vulnerability to cavitation, and plant and soil isotopic and chemical composition at 9 sites along a depth to watertable gradient of 0·3–5·7 m in Owens Valley. Contrary to expectations, the grass species was more resistant to water stress-induced cavitation than either shrub species. However, grass cover declined in sites with deeper watertables while shrub cover remained constant. Water isotopes indicated shallower rooting depths in grasses than in shrubs, although the phreatophytic shrub Ericameria nauseosa had enriched leaf water isotopes at deep groundwater sites, indicating water stress. Sites with lower grass cover contained less soil nitrogen (N) that was also more isotopically enriched, which is indicative of greater ecosystem N losses. These results show that groundwater depth is correlated with a number of ecosystem traits in these Great Basin Desert ecosystems and should be considered when evaluating future changes in groundwater depth. Copyright © 2010 John Wiley & Sons, Ltd.