Abstract. The effect of soil drought on water-use efficiency (WUE) and water relations was examined for potted Artemisia tridentata Nutt. and Pinus ponderosa Laws., a dominant Great Basin desert shrub and a Sierran montane tree, respectively. Before the onset of drought, A. tridentata had slightly higher photosynthetic rates than P. ponderosa and A. tridentata maintained positive photosynthetic rates at substantially lower water potentials (Ψ). Complete stomatal closure and cessation of photosynthesis occurred at a Ψ of ca. −2.5 MPa for P. ponderosa and less than −5.0 MPa for A. tridentata. Repeated drought cycles caused a small increase in bulk modulus of elasticity for A. tridentata and neither species exhibited significant osmotic adjustment. WUE was similar at Ψ≥−1.0 MPa but as Ψ decreased P. ponderosa consistently maintained higher WUE than A. tridentata. The primary factor contributing to higher WUE for P. ponderosa was the rapid decrease in stomatal conductance with decreasing Ψ. Comparatively low WUE for A. tridentata, a drought tolerant species, suggests that efficient use of water is a conservative ecophysiological ‘strategy’ that can be detrimental in a competitive water-limited environment. The combination of profligate use of water and a high degree of drought tolerance may be a more successful combination of physiological characteristics in certain dry habitats.