Water stress, concentrations of foliar nutrients and damage of foliage by insects were studied over an eleven month period, for eight dieback eucalypts and eight closely matched healthy trees growing in close association on two grazing properties near Brisbane. Four healthy eucalypts in a neighbouring State Forest were also studied. The study region had suffered severe climatic stress between 1972 and 1976 when dieback was first observed by residents and when high populations of defoliating insects were observed. Dieback trees had a higher proportion of foliage damaged by insects and higher concentrations of foliar nutrients than did matched healthy trees. The study period was one of low climatic stress during which dieback and healthy trees followed similar seasonal patterns of predawn xylem pressure potential. Dieback trees developed lower daytime minimum xylem pressure potentials than did matched healthy trees, and differed in their stomatal responses. A model of initiation and development of rural eucalypt dieback is proposed. This may have general application to many non-specific rural diebacks in which heavy insect damage is implicated. The balance between rural eucalypts and their insect herbivores is precarious. Any factor capable of causing extensive defoliation, or an increase in foliar nitrogen, or an increase in populations of insect herbivores may upset this balance. A positive feedback loop may be activated, whereby the production of nitrogen rich epicormic foliage enhances a build up of insect populations. Repeated insect defoliation leads to tree dieback. Evidence in the literature supporting the model is reviewed and aspects requiring further research are outlined.