Hakea psilorrhyncha R. M. Barker seedlings were subjected to a two-way interaction experiment with two levels of water availability and two levels of light. Physiological drought was imposed by adding 6000 MW polyethylene glycol (PEG), at an osmotic potential of −0·56 MPa, in a continuous-flow drip irrigation system. Unstressed plants (-PEG) were watered with distilled water (osmotic potential of −0·01 MPa). Seedlings were grown under natural light (120–500 μmol m−2 s−1 sunlight at midday +L) or shaded (<150 μmol m−2 s−1 sunlight at midday; −L. Plant morphology tissue water relations and carbon isotope composition (δ13C) were measured after 12 wk growth. The smallest leaves had the highest mass per unit area (LMA, an index of sclerophylly) and were present in the +PEG+L treatment, whereas the largest, thickest leaves had the lowest density and were produced in the −PEG+L treatment. Plants in shade were smaller and less sclerophyllous. There was a linear decrease in osmotic potential at full turgor and turgor loss point, and an increase in elastic modulus and δ13C, as level of sclerophylly increased, with −PEG−L leaves at one extreme and +PEG+L at the other. We conclude that high levels of sclerophylly induced by low water availability and high light intensity are associated with substantial drought tolerance in H. psilorrhyncha.