Large-scale shrub encroachment poses significant challenges for the preservation and enhancement of ecosystem functions and services in grassland ecosystems. However, the impacts of shrub encroachment on grassland ecosystem multifunctionality (EMF) remain poorly understood. This study assessed the impact of shrub encroachment on 23 key ecosystem functions in a semiarid grassland, as well as the influence of plant, soil, and microbial factors on both aboveground and belowground EMF. Compared with areas with slight shrub encroachment, most individual aboveground ecosystem functions increased by 62.24%-251.05% with moderate shrub encroachment (p < 0.05). However, these functions significantly decreased (42.96-96.91%) under severe and extremely severe shrub encroachment. In contrast, individual belowground ecosystem functions consistently decreased across all stages of shrub encroachment, with reductions between 29.27% and 94.85% (p < 0.05). Shrub encroachment caused a decoupled response pattern, with the aboveground EMF initially increasing but then decreasing (R-2 = 0.83, p < 0.001), whereas the belowground EMF decreased linearly (R-2 = 0.86, p < 0.001). Soil bulk density and bacterial community composition were identified as the primary drivers of variations in aboveground EMF, whereas plant community composition and soil pH were crucial for regulating belowground EMF. Moreover, plant diversity was essential for maintaining both aboveground and belowground EMF. This study highlights the importance of considering both the stage of shrub encroachment and the specific ecosystem functions affected. These results emphasize the pivotal role of soil and microbial factors in shaping EMF, which is critical for predicting ecosystem responses to extensive changes in vegetation driven by intensifying climate change and human activities.