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Abstract: In Marlborough, New Zealand, olives are becoming an important crop alongside grapes. However, despite olives being drought resistant, they are generally planted on the poorer free-draining soils. Also, with the strong increase in cropping area, the demand for irrigation water has increased dramatically. In this research, we investigate the impact of short-term water stress on plant physiological processes, crop yield and oil quality in Marlborough, New Zealand. For that purpose, during the dry summer of 2000–2001, two trees were kept without irrigation for 64 days while two neighbouring trees were irrigated following standard practice. The trees were measured for transpiration (E), leaf and stem water potential (Ψ L and Ψ S ), every other day, from dawn to dusk for three weeks from just before irrigation was started up again. All four trees were wired up for measuring stem sap flow (T) which was recorded hourly and a basic meteorological station provided weather data. Fruit and shoot development was measured weekly. It was found that under the short period of dry conditions with soil moisture (() dropping to <5%, olive trees kept functioning at a very low level with Ψ L and Ψ S reduced from −1 to <−4.0MPa (T) reduced from 20 to 5mm/h and (E) reduced from 1.5 to 1.0mmolm−2 s−1. Within 10 days of restarting irrigation all these parameters were back to pre-drought levels. Both fruit and shoot growth came to a standstill within a week after drought was induced. During the first few days after re-watering, a high variability in Ψ L was found between leaves from the same trees. This variability disappeared after ∼six days. Shoot growth did not recover after re-watering but fruit growth rate, became the same as for continuously irrigated trees within days, but fruit size did not manage to recover before harvest. Yield from the dry trees was low because berry and pit weight were reduced by almost 50% at harvest, had a lower oil and percentage and were lower in phenolics. Stem sap flow was found to give a very good continuous measurement for the hydration status of the olive trees. [Copyright &y& Elsevier]