AbstractIntense soil cultivation and climate change have detrimental effects on soils. Solutions are needed to improve the biological quality and water holding capacity of agricultural soils. A greenhouse experiment was conducted to investigate the interactive effect of compost application and drought stress on a soil/plant system in order to determine the improvement of soil quality and plant growth and the alleviation of drought stress. Lettuce (Lactuca sativa L.) was grown under greenhouse conditions in a sandy soil with sufficient mineral fertilizer application to test the effect of five compost types (three made from municipal garden and park wastes with differing nutrient contents, one from municipal household waste, and one from farm plant residues) applied at 30 Mg ha−1 dry weight, with which we compared soil quality and plant growth to soil without compost application. Treatment pots were irrigated or subjected to drought conditions during the last 14 days of lettuce growth. Assays of potential N mineralization during 28 days, dehydrogenase and β‐glucosidase activities, and a phospholipid fatty acid (PLFA) analysis were performed to assess effects on soil biological quality. Gas exchange, leaf relative water content, biomass, nitrogen accumulation, and root tip growth of lettuce were measured to investigate compost and drought stress effects on lettuce physiology. All composts improved indices of soil biological quality significantly, except for fungal abundance, relative to soil without compost. The greatest increase was obtained from farm compost, which significantly increased potential nitrogen (N) mineralization and soil enzyme activities of β‐glucosidase and dehydrogenase by factors of 4, 2, and 43, respectively. Furthermore, soil with farm compost generally showed a higher abundance of soil microbial organisms compared with soil without compost, which could be related to its high cellulose and hemicellulose contents. The lowest abundance of microbial organisms was generally found in soil with garden and park waste compost with a medium nutrient content, which could be related to its low organic matter content. The beneficial effect of compost on soil biological quality did not lead to improved lettuce growth, which suggests that soil biological quality (ameliorated by compost application) is not important for a fast‐growing crop, such as lettuce, that is sufficiently fertilized. Drought stress reduced aboveground lettuce biomass, root tip growth, and the abundance of most soil microbial groups significantly, but compost in soil did not alleviate these negative effects. In conclusion, the farm compost made from grass–clover, straw, and vegetable residues is superior to garden and park waste and household waste composts in terms of beneficial effects on soil biological quality. Compost clearly improved soil biological quality, but did not influence lettuce's response to drought stress. The knowledge gained in this study is useful for producing tailor‐made compost with desired effects of improved soil biological quality.