The amount and arrangement of habitat is a fundamental determinant of biodiversity and ecosystem processes in a landscape. Biodiversity is expected to decline following habitat loss and isolation, potentially impeding ecosystem function. But because greater isolation usually accompanies habitat loss, the effects of habitat amount and isolation can be confounded. Moreover, the type or quality of the intervening matrix habitat can mediate amount and isolation effects on biodiversity. We used a landscape microcosm of oak leaf litter patches to examine the responses of bacterial communities and the ecosystem function of oak leaf decomposition to patch size, degree of isolation, and matrix habitat type (pine litter or bare ground). We found that oak patch size had no significant effect on bacterial communities or decomposition rates. However, bacterial richness increased with greater patch isolation and when oak litter patches were surrounded by a matrix of pine litter, rather than bare ground. The benefit of patch isolation for biodiversity runs counter to that expected by island biogeography theory, suggesting that spatially dependent interspecific interactions, such as predation or competition, may override direct dispersal effects. Higher bacterial richness in oak litter patches surrounded by a pine litter matrix indicated that spillover from neighboring matrix habitat can increase local richness. Instead of greater bacterial richness enhancing ecosystem functioning, leaf litter decomposition was negatively correlated with bacterial richness: Decomposition was slower in isolated oak litter patches and patches surrounded by a pine litter matrix. This negative relationship may be a result of spatial dynamics that can promote the persistence of bacteria from pine litter habitats that are not well suited to oak litter decomposition. Overall, our experiment indicates that effects of habitat loss, isolation, and matrix quality on richness and composition may depend on spatially constrained interspecific interactions, which can determine the functional ability of communities.