Background: Saplings of mountain birch ( Betula pubescens ssp. czerepanovii ) have established in pockets of dwarf-shrub heath approximately 250 m above the treeline in the Latnjavagge Valley, northern Sweden. Aim: We examined if the establishment of these mountain birch outposts was related to favourable local microclimate, and if birch establishment has affected the surrounding vegetation, changing it from dwarf-shrub heath to more akin to birch forest floor. Methods: Daily mean and mean maximum temperatures were compared for two sites in the dwarf-shrub heath (990 m a.s.l., few birch saplings; 1060 m a.s.l., numerous birch saplings)between January 2005 and June 2006. The cover-abundance of vascular plants was estimated in sample plots in dwarf-shrub heath with mountain birch, dwarf-shrub heath without mountain birch, in heath between the upper limit of closed mountain birch forest and the treeline, and in closed mountain birch forest. Species composition and diversity were statistically compared. The presence in the dwarf-shrub heath of boreal montane species other than birch was also noted. Results: The higher elevation site, containing a higher density of birch, had a significantly higher growing season temperature than the lower elevation site. There was a significant difference in plant community composition between the alpine heath plots containing mountain birch saplings and plots without mountain birch, alpine heath with birch being more similar to the plots of the treeline ecotone and the birch forest than to alpine heath without birch. No significant difference in species diversity among plots in dwarf-shrub heath was found and species diversity increased with altitude. A number of montane species were observed in the dwarf-shrub heath, however, their distribution was not associated with that of the mountain birch. Conclusions: This study provides evidence for favourable microclimate being a key driver for the establishment of mountain birch above the treeline. In addition, the results imply that the composition of the dwarf-shrub heath changes after the establishment of mountain birch to a plant community whose composition points towards a birch forest.