Soil moisture can limit plant production in cool-temperate grasslands, particularly under recent increases in drought severity and predictions of future climate change. This necessitates research that examines moisture mitigation strategies under the dominant land use of grazing. We examined the effectiveness of plant litter in regulating soil moisture dynamics and associated plant production in a native grassland and tame pasture in the Aspen Parkland of Alberta, Canada during 2007/2008, specifically testing (1) how litter and defoliation (as a surrogate for grazing) alter the micro-environment at the soil surface, (2) whether litter, in combination with defoliation, alters forage production, and (3) whether production changes can be linked to observed micro-environmental changes created by litter modification. The full factorial randomized complete block design consisted of three litter treatments (litter removal, in situ control, and double litter) and three defoliation treatments (undefoliated control, light defoliation to 6.5 cm stubble height, and heavy defoliation to 2.5 cm). Soil moisture levels were assessed over four periods after summer precipitation to examine soil moisture depletion. Plant phenological development and canopy cover were also assessed throughout 2007, and biomass was measured in August 2007 and 2008. Abundant litter (up to 14,000 kg ha −1) improved soil moisture levels in both native and tame grasslands by either maintaining higher absolute moisture levels or reducing total moisture loss after rainfall. Both litter removal and double litter reduced total growing season production compared to in situ levels at the Native Site, despite highest vegetation cover in litter removal plots. High litter levels also improved growth of individual grass tillers at this site, but negatively impacted sexual production. Conversely litter removal improved overall production at the Tame Site, although litter did enhance grass tiller recovery following mid-season defoliation at both sites, in part due to positive influences on soil moisture. Treatment effects on plant production were less pronounced in 2008 than in 2007. Overall, high litter levels improve soil moisture retention and can improve or stabilize plant production particularly in native prairie sites, and can provide an important drought management strategy in the Aspen Parkland.