Spatial environmental heterogeneity is considered a fundamental factor for the maintenance of plant species richness. However, it still remains unclear whether heterogeneity may also facilitate coexistence at fine grain sizes or whether other processes, like mass effects and source sink dynamics due to dispersal, control species composition and diversity at these scales. In this study, we used two complimentary analyses to identify the role of heterogeneity within 15 m × 15 m plots for the coexistence of species-rich annual communities in a semi-arid environment along a steep precipitation gradient. Specifically, we: (a) analyzed the effect of environmental heterogeneity on species, functional and phylogenetic diversity within microsites (alpha diversity, 0.06 m ² and 1 m ²), across microsites (beta diversity), and diversity at the entire plot (gamma diversity); (b) further we used two null models to detect non-random trait and phylogenetic patterns in order to infer assembly processes, i.e. whether co-occurring species tend to share similar traits (trait convergence) or dissimilar traits (trait divergence). In general, our results showed that heterogeneity had a positive effect on community diversity. Specifically, for alpha diversity, the effect was significant for functional diversity, and not significant for either species or phylogenetic diversities. For beta diversity, all three measures of community diversity (species, functional, and phylogenetic) increased significantly, as they also did for gamma diversity, where functional measures were again stronger than for species or phylogenetic measures. In addition, the null model approach consistently detected trait convergence, indicating that species with similar traits tended to co-occur and had high abundances in a given microsite. While null model analysis across the phylogeny partly supported these trait findings, showing phylogenetic underdispersion at the 1m ² grain size, surprisingly when species abundances in microsites were analyzed they were more evenly distributed across the phylogenetic tress than expected (phylogenetic overdispersion). In conclusion, our results provide compelling support that environmental heterogeneity at a relatively fine scale is an important factor for species co-existence as it positively affects diversity as well as influences species assembly. Our study underlines the need for trait-based approaches conducted at fine grain sizes in order to better understand species coexistence and community assembly.