Abstract: Shrub encroachment is a widespread consequence of global change in dryland grasslands, yet how environmental context mediates shrub-herb interactions and their effects on plant carbon-nutrient coupling remains poorly understood. Here, we combined a large-scale field transect spanning a natural aridity gradient with a complementary greenhouse pot experiment to examine how shrub-mediated environmental changes influence foliar nitrogen (N), phosphorus (P), and non-structural carbohydrates (NSCs) in coexisting herbaceous species. Across Inner Mongolian drylands, mature shrub (Caragana stenophylla) patches consistently enhanced foliar N and P concentrations of understory herbs while suppressing NSCs accumulation, indicating a trade-off between nutrient acquisition and carbon storage. However, these inhibitory effects on carbon reserves weakened with increasing aridity, such that shrub-herb interactions shifted toward neutral or facilitative outcomes for NSCs under drier conditions. In contrast, under controlled greenhouse conditions, C. stenophylla seedlings suppressed nutrient uptake and altered NSC dynamics in coexisting herbaceous seedlings, reflecting competitive interactions associated with the limited cumulative environmental modification capacity of early-stage shrub-associated environments. Responses differed markedly between herbaceous functional groups: forbs (e.g. Artemisia frigida) exhibited greater sensitivity to shrub presence and drought than grasses (e.g. Leymus chinensis), driven by coordinated variation in leaf and root functional traits. Together, our results demonstrate that shrub-induced microsite modifications reshape herbaceous carbon-nutrient coupling in an environment-dependent manner, with implications for predicting biogeochemical and vegetation dynamics in dryland grasslands under increasing climatic stress. PTED MANUSCRIPT