At present, land use optimization at small watershed scale is the key measure to control soil erosion, restore the eco-environment and improve the farmers’ living standard on the Loess Plateau, China. Based on the land use survey maps of 1966, 1988, 1997, 2003 and the digital topographic map of 1984 in Yangou watershed, and assisted by spatial techniques of GIS, the basic characteristics and driving forces of land use change in Yangou watershed are analyzed. According to the summarization of land-use optimization characteristics since 1997, and with the help of continuous monitoring data for years and farmer investigation data, this paper appraises eco-environmental benefits, economic benefits and sustainability of Yangou watershed. We have used sediment reduction benefits, coverage ratio of permanent vegetation, per capita food production and per capita income of farmers as indices. The results show that Yangou watershed project has successfully controlled the soil and water loss and the farmers’ living standard has been improved markedly by reasonable adjustment to land use structure. The benefit of sediment reduction is higher than 80% and the coverage ratio of permanent vegetation reaches 61.03%. In 2006, the per capita income increased by 1493 yuan compared with the year 1998.The successful measures and experiences of Yangou watershed are worth promoting on the Loess Plateau.