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Differences in vegetative growth, gas exchange, xylem hydraulic properties and water use efficiency of biomass production were investigated on young plants of three Olea europaea L. cultivars (Cobrançosa, Madural and Verdeal Transmontana), submitted to contrasting water availability regimes. Low water availability (LW) affected growth and biomass accumulation of the three cultivars. However, Cobrançosa plants were the less affected. Under LW conditions, total leaf area was sharply reduced due to a combination of leaf growth reduction and shedding of older leaves, minimising water losses by transpiration. Water stress also caused a marked decline on photosynthetic capacity and stomatal control was the major factor affecting photosynthesis. Under LW, water use efficiency of biomass production was improved in Cobrançosa, whereas it decreased considerably in Madural and Verdeal Transmontana. In all cultivars, water stress induced an increase in xylem vessel frequency, providing a greater vascular potential and a greater security of xylem sap conduction under drought conditions. From the behaviour of Cobrançosa plants, with a lower allocation of assimilates to leaves, smaller leaves, a smaller reduction in net assimilation rate and photosynthetic rate, a more efficient water transport through the xylem, and a more enhanced water use efficiency of biomass production under LW, we consider this cultivar very promising for cultivation in semi-arid areas. © 2006 Elsevier B.V. All rights reserved.