Background: Numerous studies have shown that nitrogen (N) deposition decreases biodiversity in terrestrial ecosystems. To explain the N-induced species loss, three functionally based hypotheses have been proposed: the aboveground competition hypothesis, the belowground competition hypothesis, and the total competition hypothesis. However, none of them is supported sufficiently by field experiments. A main challenge to testing these hypotheses is to ascertain the role of shoot and root competition in controlling plant responses to N enrichment. Simultaneously examining both aboveground and belowground responses in natural ecosystems is logistically complex, and has rarely been done. Methodology/Principal Findings: In a two-year N addition experiment conducted in a natural grassland ecosystem, we investigated both above- and belowground responses of plants at the individual, species, and community levels. Plants differed significantly in their responses to N addition across the different organizational levels. The community-level species loss was mainly due to the loss of perennial grasses and forbs, while the relative abundance of plant species was dependent mainly on individual-level responses. Plasticity in biomass allocation was much smaller within a species than between species, providing a biological basis for explaining the functionally based species loss. All species increased biomass allocation to aboveground parts, but species with high belowground allocations were replaced by those with high aboveground allocations, indicating that the increased aboveground competition was the key process responsible for the observed diversity loss after N addition in this grassland ecosystem. Conclusions/Significance: Our findings shed new light on the validity of the three competing hypotheses concerning species loss in response to N enrichment. They also have important implications for predicting the future impacts of N deposition on the structure and functioning of terrestrial ecosystems. In addition, we have developed a new technique for ascertaining the roles of aboveground and belowground competition in determining plant responses to N fertilization.