Remote rural areas, which are generally the source regions for drinking water in small towns in China, experience nitrate pollution due to intensive agricultural activities. However, little is known about the nitrate sources of these waterbodies and how human activities affect the water quality in these rural areas. Here, a pair of rural watersheds on the Chinese Loess Plateau (CLP) were selected for study. One of the watersheds, which provides drinking water for local villages and a nearby small town, has experienced valley reshaping, damming and agricultural land consolidation, whereas the other one was not affected by human activities. Water chemistry monitoring and environmental isotope analysis were combined to identify the nitrate sources of the surface and groundwater in the dammed and natural watersheds and to assess the effects of landform transformation and agricultural and living activities on water quality. The results demonstrated that nitrate concentrations in both watersheds were lower than 10 mg L−1. However, the seasonal nitrate contents in the surface (0.42–0.52 mg L−1) and groundwater (1.86–3.65 mg L−1) of the dammed watershed were significantly lower than those of the natural watershed (surface water: 0.92–2.07 mg L−1; groundwater: 2.73–8.21 mg L−1). Isotope analysis demonstrated that nitrate fertilizer, soil ammonium, and manure and septic waste were the main sources of nitrate in the surface water of the two watersheds, while the nitrate in the groundwater mainly originated from the nitrification of soil ammonium and manure and septic waste. Compared to the natural watershed, the dammed watershed had increased inputs of agricultural fertilizers in the surface water. However, there was no significant difference in the groundwater nitrate sources between the two watersheds. The results also demonstrated that denitrification and dissimilatory nitrate reduction to ammonium (DNRA) probably occurred in the groundwater during the wet season, while nitrification likely occurred during the dry and snowmelt seasons. Hierarchical cluster analysis (HCA) showed that there were strong interactions between the surface runoff and the reservoir water in the dammed watershed, while in the natural watershed, streamflow had a close relationship with the groundwater. We concluded that valley reshaping, damming and agricultural land consolidation increased the nitrate input from mineral fertilizers in the watershed, but decreased the nitrate concentrations in the surface water through changing the transformation and transportation processes of nitrate. However, these activities had little influence on the groundwater, while the time lag between land consolidation and the groundwater quality response should be considered in the future. This study aids in developing strategies for the comprehensive management of watershed and drinking water sources in rural regions.