This study combines existing hydraulic principles with recently developed methods for probing leaf hydraulic function to determine whether xylem physiology can explain the dynamic response of gas exchange both during drought and in the recovery phase after rewatering. Four conifer species from wet and dry forests were exposed to a range of water stresses by withholding water and then rewatering to observe the recovery process. During both phases midday transpiration and leaf water potential (Ψ_leaf) were monitored. Stomatal responses to Ψ_leaf were established for each species and these relationships used to evaluate whether the recovery of gas exchange after drought was limited by postembolism hydraulic repair in leaves. Furthermore, the timing of gas-exchange recovery was used to determine the maximum survivable water stress for each species and this index compared with data for both leaf and stem vulnerability to water-stress-induced dysfunction measured for each species. Recovery of gas exchange after water stress took between 1 and >100 d and during this period all species showed strong 1:1 conformity to a combined hydraulic-stomatal limitation model (r² = 0.70 across all plants). Gas-exchange recovery time showed two distinct phases, a rapid overnight recovery in plants stressed to <50% loss of leaf hydraulic conductance (K_leaf) and a highly Ψ_leaf-dependent phase in plants stressed to >50% loss of K_leaf. Maximum recoverable water stress (Ψ_min) corresponded to a 95% loss of K_leaf. Thus, we conclude that xylem hydraulics represents a direct limit to the drought tolerance of these conifer species.