<p>Prolonged drought affects plant–soil interactions, with cascading impacts on ecosystems. We conducted a pot experiment using soils collected from a field experiment in an Australian grassland where rainfall had been manipulated for seven years to test how litter mediates drought effects on plant growth, nutrient cycling, and microbial communities. Two common pasture species (<i>Plantago lanceolata</i>, forb; <i>Microlaena stipoides</i>, grass) were grown for three months in soil maintained at 70% or 40% water holding capacity, reflecting field manipulations, with or without leaf litter of the same species. Litter increased shoot biomass, but not total biomass, of both species. Further, litter increased <i>M. stipoides</i> root biomass under drought but decreased root biomass under ambient watering. Litter increased microbial biomass carbon, and drought reduced microbial biomass carbon and nitrogen, consistently across both species. Further, in <i>M. stipoides</i>, litter increased most microbial biomarkers (e.g., PLFA, NLFA), while drought increased Gram-positive and Actinobacteria. By contrast, in <i>P. lanceolata</i>, litter reduced biomarker contents under ambient conditions for Gram-positive and Actinobacteria and under drought conditions for Gram-negative, Protozoa, and Arbuscular Mycorrhizae. Across all treatments, <i>P. lanceolata</i> biomass generally showed positive associations with multiple microbial biomarkers, whereas <i>M. stipoides</i> biomass was positively related only to arbuscular mycorrhizae and negatively to other microbial biomarkers, suggesting resource competition. Litter mass loss was positively correlated with <i>M. stipoides</i> root biomass and an arbuscular mycorrhizal biomarker under drought conditions, indicating an important plant–soil biotic feedback. Our findings suggest that drought moderate plant community dynamics via species-specific changes in plant-soil biotic interactions, including feedbacks mediated by litter decomposition.</p>