Abstract: Understanding the land use change and its impact on environment, and finding the underlying driving forces may be helpful to sustainable land use planning and ecological restoration. Using the GIS techniques, this paper analyzed land use changes and environmental status in Zhifanggou catchment in the period from 1938 to 2000 based on the data from aerial photos and field investigations. Meanwhile, the impact of policies on the land productivity and environment was also discussed. The results showed that the land use transformation between agricultural land and vegetation land determined the environment status of the watershed. In 1958, the watershed was not only seen the most severe soil erosion but also had the lowest land productivity due to completely destruction of vegetation and rapid expansion of farmland, thus resulting in the extremely devastated environment. After 1958, with the recovery of vegetation, especially with the implementation of the policy of "Conversion of Slope Farmland to Forest and Grass Plan" by the Central Government of China, the environment improved greatly and reached the highest level in 2000 during the research period. The analysis of land productivity changes showed that the increase in land productivity contributed most to this process. It greatly reduced the minimum farmland area required per capita and mitigated the pressure on expansion of farmland due to population increase, and facilitated the conversion of farmland to forest, shrub and pasture, indirectly improving the environment in this watershed. The policies can improve the land productivity by adopting and extending new techniques and methods thus improving the environment, yet direct subsidies such as food and money can also have the same effect. What policies should be made depends on the social and economic development as well as specific conditions.