A positive relationship between plant species richness and ecosystem functioning has been found in a number of experimental studies. Positive species interactions at high species numbers have been suggested as a cause, but mechanisms driving positive interactions have not often been tested. In this experiment we asked three questions: (1) What is the relationship between species richness and productivity in experimentally constructed moss communities? (2) Is this relationship affected by plant density? and (3) Can changes in moisture absorption and retention explain observed relationships? To answer these questions we exposed arctic tundra moss communities of different species richness levels (1-11 species) and two different densities in the greenhouse to two levels of drought (short and long). Biomass (by the community and individual species), height and community moisture absorption and retention were measured as response variables. High species diversity increased productivity (more so in low-density plots than in high-density plots), but only when plots were watered regularly. Plot moisture retention was improved at high species richness as well, and plant height and variation in height was increased compared to plants in monoculture. Under high-density and short-drought conditions 10 out of 12 species grew better in mixture than in monoculture, but under the long drought treatment only six species did. A positive feedback loop between biomass and improved humidity under high diversity was supported by path analysis. We conclude that in this community the relationship between species richness and productivity depends on moisture availability and density, with improved water absorption and retention likely to be the mechanism for increased plant growth when drought periods are short. Furthermore, since this is the opposite of what has been found for temperate moss communities, conclusions from one system cannot automatically be extrapolated to other systems.