We report extent and rate of land use/land cover change in a forest–grassland mosaic of Rio Grande do Sul, Brazil, during a recent period of increasing conflicts between native habitat protection and conversion. The area is part of the Atlantic rain forest biome, a Global Biodiversity Hotspot. Analyzing Landsat and Google Earth imagery, and calculating an effective conservation risk index (ECRI) as ratio of converted to remnant area, we specifically compared the effectiveness of designated fully protected areas (FP‐PAs) and Sustainable Use areas (SU‐PAs) in preventing conversion of native forest and grassland habitats for agri‐ and silviculture, relative to areas outside. Grassland area decreased by 17%, corresponding to a net loss of 59,671 ha, in the entire area. Forest gains exceeded losses, and ECRI was zero inside Full Protection PAs. Non‐native tree plantation area increased by 94% over the entire study area; cropland increased by 7%. Conversion for silviculture predominated outside the designated PAs and conversion for agriculture predominated inside the designated PAs. ECRI was generally higher for grassland than forest, and in SU‐PAs, grassland ECRI was several times higher than in areas without any protection status. These developments are in stark contrast to the high standards of the Brazilian protected area system and corresponding International Union for Conservation of Nature and Natural Resources categories. They are due to protracted regularization of land conversion and establishment of designated protection areas. Furthermore, they reveal the dilemma of previously managed grasslands in strictly protected areas being eventually succeeded by forest, and the hazards of broad interpretation of the term “sustainable development”.