Using Advanced Very High Resolution Radiometer data spanning 1981–2006 and calibrated for long-term analyses of vegetation dynamics, we examine whether vegetation cover has increased across Australia and whether there has been a differential response of vegetation functional types in response to changes in climatic growing conditions. Trends in vegetation cover are interpreted within Budyko's energy – water limitation framework. Results from an Australia-wide analysis indicate that vegetation cover (as described by the fraction of Photosynthetically Active Radiation absorbed by vegetation; fPAR) has increased, on average, by 0.0007 per year – an increase of ∼8% over the 26 years. The majority of this change is due to a 0.0010 per year increase in persistent fPAR (representing nondeciduous perennial vegetation types; up 21%). In contrast, recurrent fPAR (representing deciduous, annual and ephemeral vegetation types) decreased, on average, by 0.0003 per year (down 7%), the trends of which are highly seasonal. Over the same period, Australian average annual precipitation increased by 1.3 mm yr−2 (up 7%). A site-based analysis using 90 long-term meteorological stations with minimal localized land-cover changes showed that energy-limited sites where total fPAR increased generally experienced decreases in precipitation, and water-limited sites that experienced decreases in cover were almost always associated with decreases in precipitation. Interestingly, where vegetation cover increased at water-limited sites, precipitation trends were variable indicating that this is not the only factor driving vegetation response. As Australia is a generally highly water-limited environment, these findings indicate that the effective availability of water to plants has increased on average over the study period. Results also show that persistent vegetation types have benefited more than recurrent types from recent changes in growing conditions. Regardless of what has been driving these changes, the overall response of vegetation over the past 2–3 decades has resulted in an observable greening of the driest inhabited continent on Earth.