Understanding the mechanisms of species coexistence is key to predicting patterns of species diversity. Historically, the ecological paradigm has been that species coexist by partitioning resources: as a species increases in abundance, self-limitation kicks in, because species-specific resources decline. However, determining coexistence mechanisms has been a particular puzzle for sedentary organisms with high overlap in their resource requirements, such as plants. Recent evidence suggests that plant-associated microbes could generate the stabilizing self-limitation (negative frequency dependence) that is required for species coexistence. Here, we test the key assumption that plant–microbe feedbacks cause such self-limitation. We used competition experiments and modelling to evaluate how two common groups of soil microbes (rhizospheric microbes and biological soil crusts) influenced the self-limitation of two competing desert grass species. Negative feedbacks between the dominant plant competitor and its rhizospheric microbes magnified self-limitation, whereas beneficial interactions between both plant species and biological soil crusts partly counteracted this stabilizing effect. Plant–microbe interactions have received relatively little attention as drivers of vegetation dynamics in dry land ecosystems. Our results suggest that microbial mechanisms can contribute to patterns of plant coexistence in arid grasslands.