Plants are frequently challenged by osmotic stresses. How plant cells sense environmental osmolarity changes is not fully understood. We report that Arabidopsis Decapping 5 (DCP5) functions as a multifunctional cytoplasmic osmosensor that senses and responds to extracellular hyperosmolarity. DCP5 harbors a plant-specific intramolecular crowding sensor (ICS) that undergoes conformational change and drives phase separation in response to osmotically intensified molecular crowding. Upon hyperosmolarity exposure, DCP5 rapidly and reversibly assembles to DCP5-enriched osmotic stress granules (DOSGs), which sequestrate plenty of mRNA and regulatory proteins, and thus adaptively reprograms both the translatome and transcriptome to facilitate plant osmotic stress adaptation. Our findings uncover a cytoplasmic osmosensing mechanism mediated by DCP5 with plant-specific molecular crowding sensitivity and suggest a stress sensory function for hyperosmotically induced stress granules.