Water and nitrogen (N) availability to plants are spatially and temporally variable in arid and semi-arid grasslands. We aimed to investigate the eco-physiological responses of three bunchgrass species to water and N addition along a gradient of habitat degradation in the Inner Mongolian typical grasslands. The effects of water and N addition on aboveground and belowground growth and biomass allocation and water- and nitrogen-use efficiency (WUE and NUE) of Stipa grandis, Agropyron cristatum and Cleistogenes squarrosa from non-degraded, moderately-degraded and heavily-degraded grasslands, respectively, were compared. Stipa grandis had higher specific root length and WUE than C. squarrosa, while C. squarrosa had higher NUE than S. grandis in water- and N-limited conditions. Responses of A. cristatum were intermediate between those of S. grandis and C. squarrosa. Water and N addition did not have a significant effect on growth and biomass allocation of S. grandis, but it increased growth and leaf biomass allocation of A. cristatum and growth and stem biomass allocation of C. squarrosa. The three species differ in WUE, NUE, biomass allocation and responses to water and N addition, and these differences are adaptive to their respective habitats. The degraded grasslands can be restored by an increase in water and N availability such as is expected to occur via climatic change, but S. grandis will not benefit from the increases.