Mycorrhizal (VAM) and phosphorus (P)-supplemented nonmycorrhizal neem plants (non-VAM) of comparable size and tissue nutrition were subjected to a slowly developing drought. VAM and non-VAM plants responded to drought similarly. However, mycorrhiza compensated for low P supply, allowing VAM plants to have comparable growth, tissue P, and other physiological parameters as non-VAM plants, which received higher P supply. Drought decreased growth, transpiration (E), photosynthetic rate (A), stomatal conductance (gs), and plant water status. Osmotic adjustment did not occur, but the relatively low osmotic potential of this species helped maintain turgor during drought. Plant water relations and A of stressed plants fully recovered in 24 hours after rehydration, while gs and E partially recovered. Instantaneous water use efficiency (A/E) increased during drought and recovery, except for a decrease at peak stress due to very low A. Carbon isotope discrimination (D) values of mature leaves remained constant regardless of mycorrhiza or drought. However, D decreased in expanding leaves that developed during a drought period, indicating an increased long-term water use efficiency of these leaves.