The hypothesis that water relations and growth of phreatophytic Tamarix ramosissima Ledeb. and Populus euphratica Oliv. on dunes of varying height in an extremely arid Chinese desert depend on vertical distance to a permanent water table was tested. Shoot diameter growth of P. euphratica was inversely correlated with groundwater depth (GD) of 7 to 23 m (adj. R2 = 0.69, P = 0.025); growth of T. ramosissima varied independent of GD between 5 and 24 m (P = 0.385). Pre-dawn (pd) and midday (md) water potentials were lower in T. ramosissima (minimum pd −1.25 MPa, md −3.6 MPa at 24 m GD) than in P. euphratica (minimum pd −0.9 MPa, md −3.05 MPa at 23 m GD) and did not indicate physiologically significant drought stress for either species. Midday water potentials of P. euphratica closely corresponded to GD throughout the growing season, but those of T. ramosissima did not. In both species, stomatal conductance was significantly correlated with leaf water potential (P. euphratica: adj. R2 = 0.84, P < 0.0001; T. ramosissima: adj. R2 = 0.64, P = 0.011) and with leaf-specific hydraulic conductance (P. euphratica: adj. R2 = 0.79, P = 0.001; T. ramosissima: adj. R2 = 0.56, P = 0.019); the three variables decreased with increasing GD in P. euphratica. Stomatal conductance of P. euphratica was more strongly reduced (> 50% between −2 and −3 MPa) in response to decreasing leaf water potential than that of T. ramosissima (30% between −2 and −3 MPa). Tolerance of lower leaf water potentials due to higher concentrations of leaf osmotically active substances partially explains why leaf conductance, and probably leaf carbon gain and growth, of T. ramosissima was less severely affected by GD. Additionally, the complex below-ground structure of large clonal T. ramosissima shrub systems probably introduces variability into the assumed relationship of xylem path length with GD.