Headwater streams subjected to anthropogenic impacts are prone to environmental quality decay, which may affect stream functioning. To investigate the effects of loss of environmental quality in stream functioning, we tested the hypothesis that leaf breakdown is faster in streams with higher environmental quality, and that invertebrate community structure and microbial biomass are negatively affected by habitat simplification resulting from environmental degradation. We submerged Alchornea glandulosa leaves in litter bags in nine streams, in Southern Brazil, in an environmental gradient. We characterized breakdown rates (k), physical in-stream characteristics, abundance of invertebrate taxa, and functional groups and microbial biomass for each stream, with three mesh exclusions (fine, medium, coarse). Breakdown was faster in the most preserved stream (k = − 0.032 ± 0.005) and decreased towards the most disturbed stream (k = − 0.0034 ± 0.001). Breakdown rates were positively associated with underwater habitat complexity, equitability of macroinvertebrate taxa, and abundance of Stenochironomus sp., which together explained 51% of breakdown rate variability. Breakdown rates from the less disturbed streams (n = 7, excluding urban-influenced) were lowest in medium-mesh, intermediate in fine-mesh, and highest in coarse-mesh bags, and the only taxon that differed according to this pattern was the mining-chironomid Stenochironomus sp., which suggests that this taxon had a significant activity of leaf processing.