1.Leaf litter decomposition is a key component of global biogeochemical cycles that influences soil carbon storage, nutrient availability and plant productivity. Ongoing climate change will lead to warmer and drier conditions in many dryland regions, potentially affecting litter decomposition and nutrient dynamics. Climate change effects can be direct and/or indirect, e.g. through changes in litter quality, yet their relative importance on litter decomposition remains unclear. 2. We conducted a manipulative study in a semiarid shrubland to assess the effects of leaf litter quality, forecasted climate change, i.e. +2.5°C warming (W), 30% rainfall reduction (RR), as well as their interaction (W+RR) to elucidate their relative effects on litter decomposition. 3. Climatic effects alone reduced decomposition of a homogeneous control leaf litter collected from Helianthemum squamatum shrubs growing in unmanipulated plots by 23.4%, 18.1%, and 29.8% in the W, RR and W+RR treatments, respectively. Leaf litter quality was lower in shrubs that had been growing in warmed plots (W and W+RR), as they had lower nutrient concentrations (P, Fe) and higher C:N and C:P ratios than leaf litter produced under ambient (control) conditions. Lignin concentration was significantly lower in litter from W+RR plots, yet when both climate and litter quality were considered simultaneously, decomposition rates were 32.0%, 26.3% and 39.9% lower in W, RR and W+RR plots compared to controls. In addition, we found greater microbial N immobilization in leaf litter incubated within warmed (W and W+RR) than within non‐warmed plots (Control and RR). Structural equation modelling showed that higher litter moisture and microbial biomass contents stimulated decomposition. Simulated climate change (W, RR and W+RR) reduced decomposition indirectly by negatively affecting litter moisture contents and litter microbial biomass. Microbial nitrogen immobilization was stimulated by the lower quality (i.e. high C:N ratios) of the leaf litter collected in shrubs from warmed plots (W and W+RR). 4. Synthesis Our findings indicate that forecasted climate change conditions slow down C and N cycling in a dryland ecosystem, an effect that is further exacerbated by climate change‐induced reductions in litter quality and related reductions in bacterial and fungal biomass in litter.