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Approximately 60% of Mexico (1.973 × 106 km2) is arid or semi-arid with vegetation dominated by N2 fixing shrubs, such as mesquite (Prosopis juliflora). Little is known, however, how these ecosystems contribute to production of nitrous oxide (N2O), a known greenhouse gas. We investigated this by adding inorganic fertilizer (20 mg ammonium (NH4+) N kg-1 soil) to soil at different water contents (40%, 60%, 80%, and 100% of water-holding capacity (WHC)) sampled under the canopy of mesquite and outside its canopy, while production of carbon dioxide (CO2) and nitrous oxide (N2O), and dynamics NH4+, nitrite (NO2-), and nitrate (NO3-)) were monitored. The CO2 production rate was 1.5 times larger for soil sampled under the canopy of mesquite compared to soil sampled outside the canopy of shrubs and lower in soil incubated at 100% WHC compared to the other treatments. Production of N2O increased with increased water content within the first day, but decreased in soil at 80% and 100% WHC thereafter. The production of N2O was 1.9 times larger for soil sampled under the canopy of mesquite compared to soil sampled outside its canopy. The addition of 20 mg NH4+-N increased production of N2O 1.8-fold. It was found that the cumulative production of N2O was larger from soil sampled under the canopy of mesquite than outside it when amended with inorganic fertilizer and increased with increased water content of the soil within a day. The relationship between the emission of CO2 and N2O, water-holding capacity are discussed. [ABSTRACT FROM AUTHOR]