The evolution of loess microstructure exerts a direct impact on its collapse evolution during dry and wet (DW) cycles. In this study, a hydro-mechanical coupling numerical model considering DW cycles and mechanical loading was established by extending the Barcelona Basic model, meanwhile combining with the test results to reveal the effect of DW cycling on the collapse deformation and strength response of loess. Additionally, the microscopic mechanism of loess collapse evolution was revealed through microscopic tests. Results indicated DW cycles caused the net compaction of loess, with the first DW cycle exerting the most significant effect on its deformation, consequently deteriorating the loess. Wetting under constant loading leads to a collapse of macrostructures formed by aggregates. Moreover, DW cycles transformed the structural units from line and surface contact to point. The basic structural units exhibited obvious grade properties, in which DW cycles trigger the collapse of compound aggregates, with the number of relatively stable mononuclear aggregates and intergranular pores increasing. DW cycles in an open environment induced the loss of cementing materials such as soluble salts and reduced the bonding strength among basic structural units. This subsequently tended to weaken the structural properties of loess and decreased the mechanical properties.