1. Climate change increases aridity in many drylands worldwide, which has significant consequences for ecosystem functioning and may reduce carbon sequestration. However, responses of major carbon cycle processes in drylands, including primary production and decomposition, to increasing aridity remain poorly understood. 2. In this study, we assessed the quantitative effects of precipitation and the underlying impacts of functional traits on above-ground net primary production (ANPP) and plant litter decomposition in herbaceous Mediterranean plant communities. A dataset encompassing a wide range of precipitation (similar to 50-1000mm) was generated by selecting four field sites along a natural precipitation gradient and applying rainfall manipulations over several years. 3. Across the entire dataset, ANPP and decomposition decreased non-linearly with declining precipitation, showing steeper reductions at low compared to high precipitation levels. Notably, above similar to 400mm, the two processes followed a similar pattern, but below this threshold, ANPP dropped more rapidly, while decomposition decreased less and remained relatively high. 4. Plant functional traits associated with low growth rates exacerbated the reduction of ANPP at the drier sites, whereas higher litter quality at these sites compared with the wetter sites enabled relatively high rates of litter decomposition. The latter findings were confirmed by a litter transplantation study, where litter from the arid site decomposed faster at all sites compared to litter from the wetter sites. In addition, dryland decay mechanisms, such as photodegradation and microbial degradation enabled by non-rainfall water sources, might have mitigated some of the dryness-related decrease in decomposition. 5. Increasing climate change-induced aridity in drylands may drive long-term shifts in herbaceous vegetation composition towards smaller, less productive species that produce more labile litter. This trend is expected to accelerate the decline in production more than the decline in decomposition, likely reducing carbon sequestration.