Aims Shrub encroachment significantly impacts grassland ecosystem structures and functions. Arbuscular mycorrhizal fungi (AMF), as key soil microorganisms that are symbiotic with plants, have important effects on plant growth and soil properties. This study explored the dynamics and drivers of AMF community diversity and colonization during shrub encroachment. Methods AMF communities in dominant plant roots were analyzed across four shrub encroachment stages on the Ordos Plateau using high-throughput sequencing and colonization rate measurements. Results AMF diversity and colonization intensity showed non-linear dynamics, increasing slightly at the moderate shrub encroachment stage (Shannon index: 2.85; colonization intensity: 58.14%) before significantly decreasing under extremely severe stages (Shannon index: 1.27; colonization intensity: 21.49%). In contrast, colonization rates consistently decreased with increasing shrub encroachment severity, from 55.92% to 6.34%. The AMF community compositions varied markedly among the shrub encroachment stages and species, with strains specific to each stage and species. Climate was the primary driver of AMF diversity, whereas plant and soil traits influenced colonization rates. Both the available phosphorus and root total phosphorus levels had significant negative effects on AMF diversity and colonization. Conclusions This study revealed that the AMF community diversity and colonization dynamics exhibited stage-specific patterns, resulting in two-way feedback with vegetation and soil. Effective grassland restoration should adopt stage-specific management strategies to increase AMF community functions.