Intense human activities break the grassland–livestock balance and accelerate grassland degradation. We evaluated the use of native dominant species combined with arbuscular mycorrhizal fungi (AMF) in order to recover grassland and restrain grassland degradation. We conducted a full factorial greenhouse experiment to evaluate the interaction effects of native species of distinct traits grass Lolium perenne (L) and legume Trifolium repens (T) with arbuscular mycorrhizal fungi (AMF) inoculation on grass productivity and soil properties across non-degraded, lightly degraded, and severely degraded soils. The grass–legume mixture was manipulated with five ratios (T:L = 1:0, T:L = 1:1, T:L = 3:1, T:L = 1:3, T:L = 0:1). The results showed that L. perenne significantly increased grassland productivity at different grass–legume ratios, regardless of AMF presence or absence. AMF inoculation increased plant N and P content uptake and improved the productivity of degraded grasslands, especially in severely degraded grasslands. The NO3−-N and available P concentrations increased in soil when the legume component increased from T:L = 0:1 (grass monoculture) to T:L = 1:0 (legume monoculture). This may be because the presence of Lolium perenne (L) can promote nitrogen fixation in legumes. Structural equation modeling indicated that grass–legume mixtures directly affected plant biomass, whereas AMF affected plant biomass via providing plant nutrients. A soil quality index based on minimum datasets indicated a significant positive effect of artificial grassland establishment on soil quality. We conclude that planting T:L = 0:1 and T:L = 1:3 combined with AMF inoculation can be used to recover degraded grassland production, and planting T:L = 1:1 and T:L = 1:3 plus AMF inoculation can be applied for grassland nutrient accumulation and stability maintenance.