Diurnal and seasonal patterns of leaf gas exchange and water relations were examined in tree species of contrasting leaf phenology growing in a seasonally dry tropical rain forest in north-eastern Australia. Two drought-deciduous species, Brachychiton australis (Schott and Endl.) A. Terracc. and Cochlospermum gillivraei Benth., and two evergreen species, Alphitonia excelsa (Fenzal) Benth. and Austromyrtus bidwillii (Benth.) Burret. were studied. The deciduous species had higher specific leaf areas and maximum photosynthetic rates per leaf dry mass in the wet season than the evergreens. During the transition from wet season to dry season, total canopy area was reduced by 70-90% in the deciduous species and stomatal conductance (g(s)) and assimilation rate (A) were markedly lower in the remaining leaves. Deciduous species maintained daytime leaf water potentials (Psi(L)) at close to or above wet season values by a combination of stomatal regulation and reduction in leaf area. Thus, the timing of leaf drop in deciduous species was not associated with large negative values of daytime Psi(L) (greater than -1.6 MPa) or predawn Psi(L) (greater than -1.0 MPa). The deciduous species appeared sensitive to small perturbations in soil and leaf water status that signalled the onset of drought. The evergreen species were less sensitive to the onset of drought and g(s) values were not significantly lower during the transitional period. In the dry season, the evergreen species maintained their canopies despite increasing water-stress; however, unlike Eucalyptus species from northern Australian savannas, A and g(s) were significantly lower than wet season values.