Direct physical interference from litter is an important mechanism driving changes in the diversity and composition of plant communities dominated by perennial species. While the consequences of litter for species diversity and composition are well known, the mechanisms shaping how litter acts as a filter on leaf and shoot functional traits to alter community structure and functional diversity remain unclear. These questions were examined using a large field experiment in native mixed-grass prairie grasslands in the brown and dark brown soil zones in central Saskatchewan, Canada. Litter additions ranging from 0 to 2,290 g m−2 were applied to plots in a response surface design, and responses including community structure, above-ground functional diversity, and community-weighted mean values for leaf functional traits were measured. Species richness, functional richness, and functional dispersion declined with increasing litter mass, but functional evenness increased. Community composition became more variable because increased litter acted as a filter on the perennial species previously present in the plots; the remaining species in a given plot were the most litter-tolerant subset of the original community in the plot. Increased litter mass affected graminoid and forb species differently. Increased litter mass selected for graminoid species characterized by greater height, leaf area, specific leaf area (SLA), leaf thickness, and leaf tissue density. In contrast, increased litter selected for forb species characterized by larger, thicker leaves, lower SLA, and lower leaf tissue density. Forbs with cauline leaves were also selected for over acaulescent growth forms. Physical interference by litter likely reduces grassland diversity and alters species composition in diverse grassland communities by forcing convergence in community trait structure, but not convergence in species composition.