Livestock grazing has been shown to shape the biodiversity of grasslands, thereby impacting ecosystem stability. Overgrazing may promote the encroachment of shrubs into these habitats through niche partitioning, specifically differences in above-versus below-ground resource usage between woody and herbaceous plants. However, grazing effects on grassland stability remains under-researched, with a paucity of comprehensive empirical studies. In our study, we conducted a seven-year sheep grazing experiment in a desert steppe of northern China. We specifically compared two habitat types: grass-dominated and shrub-encroached, aiming to discern the effects of varying grazing intensities on the stability of aboveground, belowground, and total biomass. Our results indicated that grazing increased the community-weighted mean (CWM) of fast-slow traits and reduced the species asynchrony in grass-dominated habitat, while elevated relative abundance of dominant species and reduced functional dispersion and soil property in shrub-encroached habitat. Increasing grazing intensity diminished the stability of aboveground and belowground biomass within grass-dominated habitat, without significant changes to stability of belowground biomass in shrub-encroached habitat. The CWM Fast-slow traits in grass-dominated habitat and the dominant species abundance of Reaumuria songarica in shrub-encroached habitat were negatively correlated with the stability of aboveground biomass. Thus, while grazing indirectly decreased community stability through elevating CWM Fast-slow traits in grass-dominated habitat, grazing impacted community stability in shrub-encroached habitat via increasing the dominant species abundance of R. songarica, with consequent influences on species asynchrony and stability. Together, our two-habitats experiment highlights the importance of conserving different facets of biodiversity for sustainably providing ecosystem functions and services in arid grazing grasslands.