Rising saline groundwater and reduced flooding frequency are causing dieback of Eucalyptus largiflorens F. Muell. along the Murray River in Australia. A green-leaved variant of E. largiflorens, which is probably a hybrid with a local mallee species (E. gracilis F. Muell.), tolerates saline conditions better than the more common grey-leaved variant. The green variant exhibited more negative water potentials than the grey variant, and comparison with soil water potential profiles indicated that the green variant extracted water from slightly higher up the soil profile where the salt content was lower but the soil was drier. However, the stable isotopes of water (2H and 18O) in the xylem did not differ significantly between paired green and grey trees, suggesting that both variants used the same water source. The green variant may be able to extract water for a longer period from a given point in the soil profile and tolerate a higher salt concentration around its roots than the grey variant. Predawn leaf water potentials of both variants decreased with increasing salinity of groundwater and decreasing depth to the groundwater, probably because the roots were being progressively confined to soil with lower matric potential as groundwater discharge through transpiration progressively salinized soil up the profile. The green variant had a lower assimilation rate and stomatal conductance than the grey variant, although the differences were not statistically significant during most of the year. Discrimination of 13C indicated that the green variant had a higher leaf internal CO2 concentration than the grey variant, indicative of a greater biochemical limitation on photosynthesis, perhaps resulting from the effects of operating at lower water potentials. The green variant had significantly lower stem hydraulic conductivity than the grey variant, probably because of its smaller xylem vessel diameter and higher degree of embolism. The more conservative water use of the green variant and its ability to operate at lower water potential than the grey variant appear to underlie its ability to tolerate conditions of reduced useable water above the saline groundwater. This advantage appears to outweigh the costs of increased xylem embolism and reduced assimilation.