This study explores the major drivers of Land-use/Land-cover (LULC) dynamics and the observed environmental degradation as a response to these changes in the Modjo watershed, central Ethiopia. Data for this study were generated through household survey and supplemented with remotely sensed image interpretation. The data were analyzed using descriptive statistics and remote sensing-based image processing. The findings of the study revealed that LULC dynamics together with a range of ecological changes are serious environmental problems in the study site. LULC changes are driven by a combination of proximate and underlying drivers such as economic, demographic, biophysical and institutional factors. Bareland expansion, increased surface runoff production and soil erosion are major environmental damages partly attributed to LULC dynamics in the study site. These environmental degradation processes have adverse impacts on local agricultural productivity, water resource availability and food security of communities. Thus, policy responses are needed for integrated natural resource management and livelihood sustainability in the study area.