The yield of direct-seeded rice has been shown to decrease after straw amendment. However, the reasons for the yield decrease, and any measures to alleviate it, are currently unknown. We hypothesised that straw return exerts negative effects on soil fertility and on root growth of direct-seeded rice, which subsequently reduces the remobilisation of reserves to grains under continuous flooding (CF); and that alternate wetting and drying (AWD) irrigation can alleviate these negative impacts. Field and greenhouse experiments were conducted to test the hypotheses, by comparing CF and AWD in combination with two wheat-straw treatments (incorporation and mulching). Under CF, wheat-straw incorporation decreased soil available phosphorus by 23–79%, root biomass by 10%, leaf biomass by 13%, and leaf area by 15% compared with the control with no straw incorporation; negative effects on these characteristics were lessened if the straw was mulched. The AWD treatment alleviated the negative effects of straw incorporation compared with CF, and straw mulching with AWD had no negative effects or resulted in positive effects. The results suggest that CF along with straw incorporation limits soil phosphorus availability, root growth and grain yield by affecting photosynthate accumulation and remobilisation. AWD irrigation mitigates these undesirable effects by decreasing soil total reductants, which subsequently increases soil pH and plant-available phosphorus. The proposed AWD treatment could be a promising strategy for the sustainable production of direct-seeded rice.