Abstract Aims The allocation of recent plant photosynthates to soil via arbuscular mycorrhizal (AM) fungi is a critical process driving multiple ecosystem functions in grasslands. Yet, our understanding of how defoliation modifies below-ground allocation of recent plant photosynthate and its response to drought, which is becoming more intense and frequent, remains unresolved. Methods Here we undertook a 13C pulse-labelling experiment in a mesotrophic temperate grassland to evaluate in situ how defoliation intensity modifies the transfer of recently assimilated 13C from plant shoots to roots, extraradical AM fungal hyphae, soil, and 13C-CO2 efflux (soil respiration) in response to simulated drought. Results We found that, individually, both defoliation and drought reduced initial plant 13C uptake, but when defoliation and drought were combined, we detected a significant reduction in below-ground 13C allocation to soil. Furthermore, while defoliation stimulated 13C transfer to plant roots and soil, high intensity defoliation amplified 13C-CO2 efflux relative to the amount of 13C taken up by plants. Drought stimulated 13C transfer to fungal hyphae relative to initial plant uptake. High intensity defoliation, however, suppressed both 13C enrichment of extraradical AM fungal hyphae and 13C transfer to fungal hyphae relative to initial uptake. Conclusions Our findings suggest that defoliation can reduce the transfer of recent photosynthate below-ground under simulated drought and provide new insights into how defoliation may influence grassland C allocation dynamics and cycling between plants and AM fungi in grasslands facing drought.