Summary 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 China to understand how foliar fungal pathogens influenced top‐down effects of cattle on plant diversity and productivity. When foliar pathogens were suppressed, cattle grazing strongly reduced biomass of the dominant grass, Leymus chinensis, generating competitive release that significantly increased community‐level species richness and evenness. In the absence of grazing, pathogen attack on L. chinensis had no measurable effect on host biomass. However, pathogens disrupted top‐down effects of herbivory by inhibiting grazing effects on plant biomass and species richness. Mechanistically, fungal pathogens were linked to increased alkaloid and reduced nitrogen levels in leaf tissue, which appeared to deter cattle grazing on L. chinensis. In conclusion, foliar pathogens can suppress top‐down effects of large herbivores on grassland community composition and ecosystem function by modifying the strength of their host's interactions with dominant consumers. Parasites may act as modulators of ecosystem function when their direct effects on host abundance are overshadowed by powerful influences on host traits that modify their interactions with competitors, herbivores, or predators.