Grazing can alter plant species interactions in natural rangelands, which in turn might influence the productivity of the ecosystem but we do not fully understand how spatial variability in plant diversity-biomass relationships are modulated by grazing intensity. Here, we hypothesized that plant species co-occurrence in rangelands is mainly driven by niche segregation due to grazing and heterogeneity in local resources, and that grazing therefore modulates diversity–biomass relationships. We tested our hypothesis across 35 rangeland sites in Iran, using a species co-occurrence index to assess plant spatial aggregation within each site. At each site, we measured aboveground biomass, plant diversity, topography, soil nutrients and three levels of grazing intensity. High spatial segregation of plant communities (low species co-occurrence) was found at heavily grazed sites, whereas greater spatial aggregation (high species co-occurrence) was found on low and moderate grazed sites, showing varied associational patterns of species with grazing intensity. Soil nutrients increased with grazing intensity and spatial segregation of plant communities was greater at sites with high soil nutrient concentrations, indicating that grazing intensity influences the spatial heterogeneity of plant communities via nutrients deposited in urine and faeces. Declining plant biomass with grazing intensity was related to a strong decline in graminoid species diversity, which suggests that the diversity-biomass relationship is influenced by selective grazing of palatable species. The relationships between species co-occurrence and biomass or plant diversity suggest non-random patterns in species co-occurrences with grazing intensity, which could be the result of competition driven by high livestock grazing intensity. We therefore suggest that rangeland stocking rates should be managed properly to maintain rangeland production while promoting plant diversity.