Parasites can catalyze or inhibit interactions between their hosts and other species, but the ecosystem-level effects of such interaction modifications are poorly understood. We conducted a large-scale field experiment in temperate grasslands of northeastern China to understand how foliar fungal pathogens (e.g., rusts and leaf spots) influenced top-down effects of large herbivores (cattle; Bos taurus) on plant diversity and productivity. In the absence of foliar pathogens, cattle grazing strongly suppressed biomass of the dominant grass, Leymus chinensis, (↓56%), generating competitive release that significantly increased plant species richness (↑75%) and evenness (↑15%). In the absence of grazing, pathogen attack on L. chinensis had no measurable effect on host biomass. However, pathogen infection greatly weakened top-down effects of herbivory by inhibiting cattle grazing on L. chinensis and negating grazing effects on plant biomass and species richness. Mechanistically, foliar pathogens were linked to increased alkaloid (↑45%) and reduced nitrogen levels (↓19%) in leaf tissue that appeared to deter cattle grazing on L. chinensis. Our results demonstrate that foliar pathogens can suppress top-down effects of large herbivores on grassland community structure and function by modifying the strength of its host’s interactions with the dominant consumer. We propose that parasites may function primarily as modulators of ecosystem function when their direct effects on host density (often dampened by evolution) are overshadowed by influences on host traits that modify host interactions with strong competitors, herbivores, or predators.