Following water, nitrogen (N) is the most frequent limiting factor to aboveground net primary production in arid ecosystems. Increased water availability can stimulate both plant nitrogen uptake and microbial nitrogen mineralization, but may also stimulate losses from the ecosystem. Here, we assess the effect of water availability on nitrogen stocks and transformations in an arid ecosystem. We conducted a field experiment with five levels of precipitation input (-80%, -50%, ambient, +50%, +80%) and two levels of N fertilization (ambient or 10 gm^-2yr^-1 NH₄NO₃) in a desert grassland of the Chihuahuan Desert. We measured in situ net N mineralization, plant N uptake, foliar N, N leaching under grass-rooting zone, and soil N availability during two years. Our results showed that increased water availability did not affect net N mineralization, but there was higher plant N uptake than with drought. Soil inorganic N pools were 2–4 times lower with increased water availability compared to drought conditions. N leaching below grass-rooting zone was higher in dry than wet conditions because of higher available N. Increased water availability differentially affected N species significantly reducing the NO₃:NH₄ ratio. The accumulation of inorganic N during drought was the result of a decoupling between microbial and plant activity, and suggests that the cycling of N is more open in dry years than in wet years.