The long-term impact of human exploitation and environmental changes has led to a decline in grassland productivity and soil fertility, which eventually results in grassland degradation. The application of organic fertilizer is an effective improvement measure; however, it is still not fully understood how the addition of organic fertilizer influences grassland soil fertility and plant composition. A set of experiments were conducted in Inner Mongolia in China to reveal the tradeoff between steppe plants and soil microorganisms and the eco-physiological mechanisms involved, and how the addition of vermicompost and mushroom residues affect microbial diversity, enzyme activities, and the chemical properties of soil in degraded Leymus chinensis grassland. Organic fertilizer improved the soil nutrient status and shaped distinct bacterial communities. Compared with the control the available phosphorus (AP) and available potassium (AK) contents were highest under treatments a3 and b3, and the aboveground biomass was highest under the b3 treatment. Soil sucrase activities increased by 7.88% under the b3 treatment. Moreover, the richness index significantly increased by 7.07% and 7.23% under the a1 and b2 treatments, respectively. The most abundant Actinobacteria and Proteobacteria were detected in the organic fertilizer treatment. A linear discriminant analysis effect size (LEfSe) indicated that the bacterial community was significantly increased under the b3 treatment. A canonical correspondence analysis (RDA) and spearman correlation heatmap confirmed that total P (TP) and urease were the key driving factors for shaping bacterial communities in the soil. Our results indicated that the application of large amounts of vermicompost and mushroom residues increased the availability of nutrients and also enhanced the biodiversity of soil bacterial communities in L. chinensis grasslands, which will contribute to the sustainable development of agro-ecosystems.