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We studied the response of Eucalyptus microtheca to drought in a greenhouse experiment. As a result of the drought the growth of the seedlings decreased and allocation patterns changed so that allocation to the roots increased. However, changes in photosynthesis and stomatal conductance under drought were rather modest. We showed, using chlorophyll fluorescence and measurements of photosynthesis under high CO2 that the biochemical capacity of photosynthesis increased under drought. The results suggest that changes in root/shoot ratio are the primary reactions that initiate a series of compensatory reactions that mitigate the effects of drought in Eucalyptus microtheca.