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The long-term interaction between elevated CO2 and soil water deficit was analysed in N2-fixing alfalfa plants in order to assess the possible drought tolerance effect of CO2. Elevated CO2 could delay the onset of drought stress by decreasing transpiration rates, but this effect was avoided by subjecting plants to the same soil water content. Nodulated alfalfa plants subjected to ambient (400 μmol mol−1) or elevated (700 μmol mol−1) CO2 were either well watered or partially watered by restricting water to obtain 30% of the water content at field capacity (ampproximately 0.55 g water cm−3). The negative effects of soil water deficit on plant growth were counterbalanced by elevated CO2. In droughted plants, elevated CO2 stimulated carbon fixation and, as a result, biomass production was even greater than in well-watered plants grown in ambient CO2. Below-ground production was preferentially stimulated by elevated CO2 in droughted plants, increasing nodule biomass production and the availability of photosynthates to the nodules. As a result, total nitrogen content in droughted plants was higher than in well-watered plants grown in ambient CO2. The beneficial effect of elevated CO2 was not correlated with a better plant water status. It is concluded that elevated CO2 enhances growth of droughted plants by stimulating carbon fixation, preferentially increasing the availability of photosynthates to below-ground production (roots and nodules) without improving water status. This means that elevated CO2 enhances the ability to produce more biomass in N2-fixing alfalfa under given soil water stress, improving drought tolerance.