Conifers and other trees are constantly adapting to changes in light conditions, water/nutrient supply and temperatures by physiological and morphological modifications of their foliage. However, the relationship between physiological processes and anatomical characteristics of foliage has been little explored in trees. In this study we evaluated needle structure and function in Norway spruce families exposed to different light conditions and transpiration regimes. We compared needle characteristics of sun-exposed and shaded current-year needles in a control plot and a thinned plot with 50% reduction in stand density. Whole-tree transpiration rates remained similar across plots, but increased transpiration of lower branches after thinning implies that sun-exposed needles in the thinned plot were subjected to higher water stress than sun-exposed needles in the control plot. In general, morphological and anatomical needle parameters increased with increasing tree height and light intensity. Needle width, needle cross-section area, needle stele area and needle flatness (the ratio of needle thickness to needle width) differed most between the upper and lower canopy. The parameters that were most sensitive to the altered needle water status of the upper canopy after thinning were needle thickness, needle flatness and percentage of stele area in needle area. These results show that studies comparing needle structure or function between tree species should consider not only tree height and light gradients, but also needle water status. Unaccounted for differences in needle water status may have contributed to the variable relationship between needle structure and irradiance that has been observed among conifers.