The rewetting of long-term drained peatlands leads to the development of eutrophic shallow lakes, gradually inhabited by reed communities. These shallow lakes are characterized by significant nutrient and methane emissions. To comprehend the fate of organic compounds from decaying Phragmites australis litter in water and anaerobic soil layers, we conducted a 1.6-year decomposition experiment. The experiment employed bulk and lignin-derived phenol analysis, as well as Fourier-transform infrared spectroscopy. As anticipated, the highest level of decomposition was observed in the surface water body of the shallow lake, while the non-rooted degraded peat exhibited the lowest decay. The bulk mass loss of plant litter decreased with depth from 55 to 27% across the four decomposition environments. Analysis using infrared spectroscopy indicated that the decrease in mass loss was primarily driven by the breakdown of carbohydrates, which constitute a significant portion of plant litter. Interestingly, litter in the rooted degraded peat layer exhibited the highest degree of lignin decay. Furthermore, the study revealed a preferential loss of vanillin phenols and an accumulation of p-hydroxyl phenols. These findings suggest that the increased methane emissions in rewetted fens may be partially attributed to the demethoxylation of vanillin phenols and the subsequent formation of p-hydroxyl phenols. In conclusion, this study provides valuable insights into anaerobic lignin decomposition of plant litter and sheds light on potential mechanisms underlying elevated methane emissions in rewetted peatlands. Furthermore, the study’s findings hold significant implications for both carbon cycling and sequestration within these ecosystems, thereby stimulating further research into the microbial community and its extended effects.