Changes in the species composition and structural characteristics of marine vegetated habitats in response to climate change or local anthropogenic impacts may alter their quality as habitat for associated fish and invertebrates. Summer densities and biomass of the eelgrass, Zostera marina, declined significantly between 1985 and 2004 in Bogue Sound, North Carolina, USA, within the present-day zone of biogeographic overlap in the distribution of this subtidal temperate species and the intertidal subtropical seagrass, Halodule wrightii. Zostera decline was associated with increased spring water temperatures and water nutrient concentrations. In contrast, Halodule did not exhibit a consistent trend of temporal change. Experimental seagrass transplants indicated that Halodule has the capacity to grow at depths greater than it currently occupies, suggesting that Halodule might, over time, replace Zostera. The abundance and diversity of infaunal invertebrates were lower in seagrass beds dominated by Halodule than in those dominated by Zostera or mixtures of the two species, suggesting that changing seagrass species composition affects associated faunal assemblages. Experimental deployment of artificial seagrass patches mimicking the structure of the two species showed that both depth and structural characteristics of seagrass explain differences in faunal assemblages. Epifaunal community structure differed significantly between structurally identical seagrass mimics deployed in intertidal and subtidal habitat, and invertebrates and fishes were significantly more abundant in artificial Zostera than Halodule patches at one of the two study sites. Synthesis of these results suggests that, in the event of continued Zostera loss, with or without replacement by Halodule, important habitat functions will be lost, and secondary productivity of these lagoonal ecosystems may significantly decrease.