In Mediterranean ecosystems, competition between opportunistic grasses and slower-growing woody species may affect the speed and path of ecosystem recovery and the success of restoration plantings after natural or human-induced disturbance. In this experiment, competitive interactions between Mediterranean annual and perennial grass species (Avena fatua and Brachypodium retusum, respectively) and an important Mediterranean shrub (Rosmarinus offlcinalis) were examined under semi-controlled conditions simulating wet and dry Mediterranean rainfall regimes. The identity of the grass competitor and the level of water availability in the plots interacted to produce differing rates of R. offlcinalis growth but similar levels of mortality. In particular, competition with the perennial grass resulted in very low rates of R. offlcinalis growth at both irrigation levels. Measurements of soil water content showed that both grasses reduced soil moisture to low levels, though this effect was temporary in the case of the winter annual grass. Resistance to hydraulic flow in roots was highest in the perennial grass, smaller but of similar magnitude in the shrub, and much lower in the annual grass. Transpirational response to decreasing leaf water potential was a quick, sharp drop in conductance in R. offlcinalis, in contrast to a moderated decline from much lower initial transpiration rates in B. retusum. The annual grass largely maintained both leaf water potential and transpiration through leaf-tip senescence and death. Quantification of the rate of hydric recuperation of leaves after irrigation of drought-stressed plants showed that the perennial grass recovered at a rate four times that of R. offlcinalis, suggesting a strategy for making quick use of rare summer rains that may contribute to its competitive success. The appropriateness of planting or suppressing grasses in restoration of disturbed sites in Mediterranean Spain is discussed.