On January 7, 2025, an M_W7.1 earthquake struck Dingri County, Xigaze City, southern Xizang. The epicenter was located on the western side of the Dengme Co Fault (DMCF) in the southern segment of the Xainza–Dinggye rift system. This event was a rare large normal-faulting earthquake within the interior of the plateau and the largest earthquake recorded instrumentally in the Xainza–Dinggye rift system. In this study, we utilized continuous Global Navigation Satellite System (GNSS) and Sentinel-1A observations to obtain the coseismic deformation fields. We then performed a joint inversion for the coseismic slip distribution on the seismogenic fault based on an elastic homogeneous half-space model and subsequently calculated the static coseismic Coulomb stress changes on surrounding active faults. Both GNSS and Interferometric Synthetic Aperture Radar (InSAR) observations revealed a pronounced east–west-trending extensional pattern, with a maximum GNSS horizontal displacement of 0.21 m and InSAR line-of-sight (LOS) deformation ranging from −1.4 to 0.8 m. The preferred slip distribution model indicates that the coseismic rupture on the seismogenic fault was dominated by normal slip, with a rupture length of about 76 km. The maximum slip reached 4.03 m at a depth of 3.94 km, and the released seismic moment was 4.26 × 10¹⁹ N·m, corresponding to an M_W7.02 event. The model predicts a distinct surface rupture along the DMCF induced by the mainshock, which is consistent with field investigations. In addition, a about 22.8 km-long, nearly north–south-trending deformation zone was detected west of the DMCF, possibly reflecting a separate or dynamically triggered slip event. The stress shadow caused by the mainshock covers the vicinity of the Kung Co Rift and the Mabujia Fault, implying a reduced short-term seismic risk. Stress loading on the Dingjie Fault and southern Guojia Fault exceeded 0.02 MPa, indicating increased seismic hazards in these areas.