Previous studies in mulga country with hard-setting red earth soils in north-west New South Wales, Australia, have demonstrated that small fenced seed production areas on local high points can contribute to regeneration of native perennial vegetation, and increases in the soil seedbank, on surrounding slopes. In this study the potential of seven microhabitats in this environment, each replicated twice, for use as seed production areas was assessed indirectly by a study of their functional characteristics and vegetation dynamics. Indices of landscape function (stability, infiltration and nutrient cycling) were determined for each of the 14 sites at the time of fencing and at the end of the study, over 2 years later, by determining the extent and surface characteristics of 53 surface types (in total) along three parallel transects within each site. Variation in establishment and survival of ground storey species among surface types was examined by co-ordination of all plants within belts centred on the line transects. At the start of the study landscape function indices for the ‘rocky ridge with rock outcrop’ microhabitat were not significantly higher than all, or some, other microhabitats. By the end of the study two of the three indices for this microhabitat were significantly higher than for all other microhabitats. This microhabitat also favoured the establishment and survival of the pastorally preferred species Monachather paradoxus Steud and Thyridolepis mitchelliana (Nees) S.T. Blake but did not favour establishment and survival of the pastorally unpreferred species Aristida jerichoensis (Domin) Henrad and Austrostipa variabilis (Hughes) S.W.L. Jacobs and J. Everett. This microhabitat was characterised by extensive areas of ‘water catchment’ surface types associated with in-situ rock outcrop, which facilitated the observed vegetation dynamics. This ‘rocky ridge with rock outcrop’ microhabitat occurs on local high points in the landscape and is readily recognised. It is therefore ideally suited for use as fenced seed production areas to assist rangeland regeneration.