Human activities markedly modify diversity patterns of plant communities and their response to environmental conditions, with subsequent consequences for ecosystem functions. We measured 11 key functional traits of 47 plant species and assessed both taxonomic and functional composition as well as above-ground biomass (AGB) of plant communities from 127 plots in the Lake Dongting wetland. Using a generalized multilevel path model, we examined the cascading effects of hydrological gradients on plant diversity and ecosystem functions in two distinct habitat types (short grassland with a natural community dominated by Carex spp. and tall grassland with a managed artificial community dominated by Triarrhena lutarioriparia and Phragmites australis). We found significant differences in the response of plant diversity and AGB to hydrological gradients. Species richness, Shannon-Wiener diversity, multiple-trait functional diversity measures (i.e., functional richness, functional dispersion & Rao's quadratic entropy) and community-weighted mean (CWM) of shoot height were all significantly higher and functional divergence and CWM of tuber significantly lower in tall grassland. AGB was significantly higher in short grassland, largely driven by variations of functional diversity rather than of taxonomic diversity. Moreover, we found a significant cascading effect of elevation and soil moisture on AGB, directly or indirectly induced by changes in functional diversity in the short grassland, while only direct effects of elevation on AGB were observed in the tall grassland. Therefore, our study provides strong evidence that human-induced changes in habitat types uncoupled the cascading effects of hydrological gradients on ecosystem functions mediated by either the taxonomic or the functional diversity.