This study examines the course and driving forces of recent vegetation change in the Mongolian steppe. A sediment core covering the last 55 years from a small closed-basin lake in central Mongolia was analyzed for its multi-proxy record at annual resolution. Pollen analysis shows that highest abundances of planted Poaceae and highest vegetation diversity occurred during 1977–1992, reflecting agricultural development in the lake area. A decrease in diversity and an increase in Artemisia abundance after 1992 indicate enhanced vegetation degradation in recent times, most probably because of overgrazing and farmland abandonment. Human impact is the main factor for the vegetation degradation within the past decades as revealed by a series of redundancy analyses, while climate change and soil erosion play subordinate roles. High Pediastrum (a green algae) influx, high atomic total organic carbon/total nitrogen (TOC/TN) ratios, abundant coarse detrital grains, and the decrease of δ13Corg and δ15N since about 1977 but particularly after 1992 indicate that abundant terrestrial organic matter and nutrients were transported into the lake and caused lake eutrophication, presumably because of intensified land use. Thus, we infer that the transition to a market economy in Mongolia since the early 1990s not only caused dramatic vegetation degradation but also affected the lake ecosystem through anthropogenic changes in the catchment area.