The structure of local ecological communities is thought to be determined by a series of hierarchical abiotic and biotic filters which select for or against species based on their traits. Many human impacts, like fragmentation, serve to alter environmental conditions across a range of spatial scales and may impact trait-environment interactions. We examined the effects of environmental variation associated with habitat fragmentation of seagrass habitat measured from microhabitat to landscape scales in controlling the taxonomic and trait-based community structure of benthic fauna. We measured patterns in species abundance and biomass of seagrass epifauna and infauna sampled using sediment cores from 86 sites (across 21 meadows) in Back Sound, North Carolina, USA. We related local faunal community structure to environmental variation measured at three spatial scales (microhabitat, patch and landscape). Additionally, we tested the value of species traits in predicting species-specific responses to habitat fragmentation across scales. While univariate measures of faunal communities (i.e. total density, biomass and species richness) were positively related to microhabitat-scale seagrass biomass only, overall community structure was predicted by environmental variation at the microhabitat, patch (i.e. patch size) and landscape (i.e. number of patches, landscape seagrass area) scales. Furthermore, fourth-corner analysis revealed that species traits explained as much variation in organismal densities as species identity. For example, species with planktonic-dispersing larvae and deposit-feeding trophic modes were more abundant in contiguous, high seagrass cover landscapes while suspension feeders favoured more fragmented landscapes. We present quantitative evidence supporting hierarchal models of community assembly which predict that interactions between species traits and environmental variation across scales ultimately drive local community composition. Variable responses of individual traits to multiple environmental variables suggest that community assembly processes that act on species via traits related to dispersal, mobility and trophic mode will be altered under habitat fragmentation. Additionally, with increasing global temperatures, the tropical seagrass Halodule wrightii is predicted to replace the temperate Zostera marina as the dominate seagrass in our study region, therefore potentially favouring species with planktonic-dispersing larva and weakening the strength of environmental control on community assembly.