Ecosystem respiration (Re) and methane (CH₄) fluxes are two important soil-atmosphere carbon exchange processes that have been well documented at the local scale. However, the spatial patterns and controlling factors of these processes remain unclear in the Tibetan alpine permafrost region at the watershed scale. We conducted a two-year field monitoring study of Re and CH₄ fluxes at three altitudinal positions on shady and sunny slopes in a Tibetan alpine grassland to determine the spatial variability in the two processes and to identify their underlying mechanisms. The microbial factor had a controlling effect on Re spatial variability in alpine grassland watersheds. The lower soil temperature and soil organic matter content at the upper slope positions on the shady slopes inhibited Re because they reduced the soil microbial activity. We found that the alpine grassland to be a net sink of atmospheric CH₄, and the average CH₄ flux rates exhibited large spatial variance ranging from −1.60 to −10.48 µg CH₄ m⁻² h⁻¹ within the watersheds. The spatial variability in soil volumetric water content explained 76% of the variation in CH₄ fluxes within the watersheds. We suggest that the influence of permafrost on hydrologic conditions may increase the spatial variability of soil moisture (measured as soil volumetric water content and water-filled pore space) in alpine grassland watersheds, and generally form poorly drained landscape at the lower slope position where Re and CH₄ uptake are inhibited. Our results highlight the indirect effects of terrain and permafrost on Re and CH₄ fluxes through their effects on biophysiochemical factors. We recommend that the spatial variability in Re and CH₄ fluxes at the watershed scale of Tibetan alpine grassland should be given more attention in earth system models, especially the variability of CH₄ fluxes with altitudinal position.