We examined the effects of drought on the water relations, osmotic adjustment and xylem vulnerability to embolism of olive (Olea europaea L.) varieties, 'Meski' and 'Chemlali'. Two-year-old self-rooted cuttings growing in sand-filled pots in a greenhouse were subjected to water stress by withholding water for 60 days. Water relations and gas exchange measurements showed that 'Chemlali' was more drought resistant than 'Meski' and had a greater capacity for osmotic adjustment through solute accumulation. However, when water stress was acute, the effect of osmoregulation on leaf cell turgor was largely counteracted by xylem cavitation. Cavitation vulnerability curves showed that both varieties were highly resistant to embolism formation. The xylem water potential inducing 50% loss of stem conductivity approached -7 MPa in 'Meski' and only slightly less in 'Chemlali'. Although the difference between varieties in susceptibility to xylem embolism was small, it appears to account in large part for the difference between them in the ability to tolerate severe drought.