Gas exchange, chlorophyll fluorescence and water potentials, together with ascorbate and glutathione concentrations, were studied during moderate and severe drought stress and in response to re-watering in Allocasuarina luehmannii seedlings. Moderate drought stress (MS) decreased stomatal conductance (gs) and net CO2 assimilation rates (A) to ∼40% and ∼60% of control values, respectively, and caused decreases in internal CO2 concentration (Ci) and maximum light use efficiency of light-acclimated photosystem II (PSII) centres (Fv′/Fm′). Severe drought stress (SS) decreased gs and A to ∼5% and ∼15% of the control values, respectively, and caused increases in Ci and PSII excitation pressure (1 − qP), as well as decreases in water potentials, effective quantum yield of PSII (ΦPSII), maximum efficiency of PSII (Fv/Fm) and Fv′/Fm′. Ascorbate and glutathione concentrations remained unaffected by drought treatments, but ascorbate became more oxidised under severe stress. MS seedlings recovered within 1 day (Ci, Fv′/Fm′) to 1 week (A, gs) of re-watering. In comparison, SS seedlings had longer-lasting after-stress effects, with recovery of many variables (gs, water potentials, Fv/Fm, ΦPSII, Fv′/Fm′) taking between 1 and 3 weeks from re-watering. We found no indication that interaction with antioxidants played a significant role in recovery. In conclusion, A. luehmannii seedlings appear to function normally under moderate drought, but do not seem to have particular metabolic tolerance mechanisms to endure severe drought, which may have implications for its persistence under climate change at the drier margins of its distribution.