The world's ecosystems are experiencing simultaneous changes in the supply of multiple limiting resources. Two of these, water and nitrogen (N) can strongly limit grassland production and can affect community composition and biogeochemical cycles in different ways. Grassland ecosystems in California may be particularly vulnerable to current and predicted changes in precipitation and N deposition, and ecosystem responses to potential interactive effects of water and N are not well understood. Here, we show strong colimitation of plant production resulting from factorial addition of water and N. In addition, water and N addition in combination led to increased dominance of the two most abundant grass species, while N addition regardless of water availability led to decreased species diversity. Late season carbon (C) flux response to water addition depended on N. Only plots that received additional water, but not N, still showed net ecosystem C uptake at the end of the experiment. Our results suggest that grassland ecosystem response to N deposition will be strongly dependent on future precipitation patterns.