Anthropogenic nitrogen (N) deposition and invasive species are causing declines in global biodiversity, and both factors impact the diversity and functioning of arbuscular mycorrhizal (AM) fungi. Shifts in arbuscular mycorrhizal fungal (AMF) communities can generate feedback to native plants and affect their success, as was observed in California’s coastal sage scrub, which is a Mediterranean-type shrubland threatened by invasive grasses. As vegetation-type conversion from native shrubland to exotic annual grassland increased along a gradient of increasing N deposition, the richness of native plant species and of spore morphotypes decreased. Rapid declines in all plant and fungal values occurred at the critical load (CL) of 10–11 kg N·ha−1·year−1, indicating that AM fungi respond to the same environmental signals as the plants, and can be used to assess CL. Shrub root colonization also decreased along the N gradient, but colonization of the invasive grass was dominated by a fine AMF endophyte that was unresponsive to elevated N. A greenhouse experiment to assess AMF functioning showed that the native shrub Artemisia californica Less. had a negative growth response to an inoculum from high-N but not low-N soils, whereas the invasive grass Bromus rubens L. had a positive response to both inocula. Differential functioning of AM fungi under N deposition may in part explain vegetation-type conversion and the decline of this native shrubland.