Plant carbon storage, soil organic carbon storage, daily and seasonal variation of soil respiration rate were measured in 2005 to understand effects of desertification on soil respiration and carbon balance in Horqin sandy grassland. Results show that (1) desertification decreased significantly daily variation of soil respiration rate and daily mean soil respiration rate; as compared with that, in the non-desertified grassland, light, moderate, heavy and severe desertification decreased daily mean soil respiration rate by 6.4%, 12.8%, 33.0% and 39.4%, respectively; (2) it also decreased carbon storage in the grassland by 50.3%, 74.0%, 86.4% and 90.2%, respectively; litter carbon storage, in particular, dropped the most drastically, and was followed by soil organic carbon storage, and plant carbon storage; and (3) it gravely disturbed carbon balance in the grassland; the amount of carbon consumed by soil respiration exceeded the amount of carbon fixed by plant photosynthesis once desertification occurred, thus turning soil organic carbon deposit into reserve carbon source to make up the shortage between carbon consumption and carbon fixation. To promote restoration of the carbon deposit in desertified grassland, it is necessary to intensify management of grassland desertification and reestablish vegetation of the grassland.