The watersheds in the hills of Nepal are facing severe stresses from deforestation, soil erosion, and depletion of plant nutrition resulting in the loss of soil quality. These watersheds have inherently fragile ecology with unstable geology, steep slopes, intense monsoon rains, and subsistence farming systems. This paper presents an overview on watershed degradation, deforestation/forest degradation, land use changes and other important factors and processes affecting soil quality, such as soil erosion and depletion of plant nutrients (soil fertility decline) in Nepal. Soil degradation in the form of soil erosion and fertility decline appears a major cause of farmland degradation.