Isolating the single effects and net balance of negative and positive species effects in complex interaction networks is a necessary step for understanding community dynamics. Facilitation and competition have both been found to operate in harsh environments, but their relative strength may be predicted to change along gradients of herbivory. Moreover, facilitation effects through habitat amelioration and protection from herbivory may act together determining the outcome of neighborhood plant-plant interactions. We tested the hypothesis that grazing pressure alters the balance of positive and negative interactions between palatable and unpalatable species by increasing the strength of positive indirect effects mediated by associational resistance to herbivory. We conducted a two-year factorial experiment in which distance (i.e., spatial association) from the nearest unpalatable neighbor (Stipa speciosa) and root competition were manipulated for two palatable grasses (Poa ligularis and Bromus pictus), at three levels of sheep grazing (none, moderate, and high) in a Patagonian steppe community. We found that grazing shifted the effect of Stipa on both palatable grasses, from negative (competition) in the absence of grazing to positive (facilitation) under increasing herbivore pressure. In ungrazed sites, belowground competition was the dominant interaction, as shown by a significant reduction in performance of palatable grasses transplanted near to Stipa tussocks. In grazed sites, biomass of palatable plants was greater near than far from Stipa regardless of competition treatment. Proximity to Stipa reduced the amount of herbivory suffered by palatable grasses, an indirect effect that was stronger under moderate than under intense grazing. Our results demonstrate that facilitation, resulting mainly from protection against herbivory, is the overriding effect produced by unpalatable neighbors on palatable grasses in this rangeland community. This finding challenges the common view that abiotic stress amelioration should be the predominant type of facilitation in arid environments and highlights the role of herbivory in modulating complex neighborhood plant interactions in grazing systems.