This study tests the hypothesis that diffusional limitation of photosynthesis, rather than light, determines the distribution of photosynthetic capacity in olive leaves under drought conditions. The crowns of four olive trees growing in an orchard were divided into two sectors: one sector absorbed most of the radiation early in the morning (MS) while the other absorbed most in the afternoon (AS). When the peak of radiation absorption was higher in MS, air vapour pressure deficit (VPD) was not high enough to provoke stomatal closure. In contrast, peak radiation absorption in AS coincided with the daily peak in VPD. In addition, two soil water treatments were evaluated: irrigated trees (I) and non-irrigated trees (nI). The seasonal evolution of leaf water potential, leaf gas exchange and photosynthetic capacity were measured throughout the tree crowns in spring and summer. Results showed that stomatal conductance was reduced in nI trees in summer as a consequence of soil water stress, which limited their net assimilation rate. Olive leaves displayed isohydric behaviour and no important differences in the diurnal course of leaf water potentials among treatments and sectors were found. Seasonal diffusional limitation of photosynthesis was mainly increased in nI trees, especially as a result of stomatal limitation, although mesophyll conductance (gm) was found to decrease in summer in both treatments and sectors. A positive relationship between leaf nitrogen content with both leaf photosynthetic capacity and the daily integrated quantum flux density was found in spring, but not in summer. The relationship between photosynthetic capacity and gm was curvilinear. Leaf temperature also affected to gm with an optimum temperature at 29 °C. AS showed larger biochemical limitation than MS in August in both treatments. All these suggest that both diffusional limitation and the effect of leaf temperature could be involved in the seasonal reduction of photosynthetic capacity of olive leaves. This work highlights the need for models of plant growth and ecosystem function to incorporate new parameters affecting the distribution of photosynthetic capacity in canopies.