Results/Conclusions Woody encroachment caused large gains in aboveground carbon stocks, with a small concomitant loss of carbon from soils. Plant diversity showed small declines at the highest Pinus densities, but diversity of soil invertebrates rapidly declined at even low Pinus or Kunzea densities. Contrary to expectation, ecosystem functioning shifted towards increased bacterial dominance of belowground energy channels, while most other soil measures changed as expected with increasing tree density (increased C:N ratios, release of recalcitrant P pools). The MySCaN model shows consistent patterns of increasing soil C:N ratio with EcM organic nitrogen utilization, and that organic nutrient utilization by EcM fungi may influence soil nutrient cycling as much as litter quality. Our results show that in native and non-native woody succession into grasslands there can be large increases in biomass carbon sequestration, with taxon-specific effects on biodiversity, and fundamental shifts in ecosystem functioning. Some of these changes are consistent with expectation based on nutrient cycling differences under EcM and AM vegetation, but other important changes in ecosystem processes were unexpected. Among other implications, our results challenge the indicator species concept for conservation, and question calls to set increased fungal dominance of soil ecosystems as a target for ecosystem restoration.