Little information is available on carbon exchange of olive orchards despite their agronomical and ecological importance. Measurements of CO₂ and water vapour exchange were performed during 2006 and 2007 with large closed chambers in an olive orchard in Cordoba (Spain) under two irrigation regimes, full and regulated deficit irrigation. Canopy assimilation was higher for full (10.8–21.3 g CO₂ m⁻² day⁻¹) than for deficit irrigation (5.1–17.4 g CO₂ m⁻² da⁻¹). Forty-five percent of gross assimilation was lost in respiration being root respiration less than 30% of total respiration. Water use efficiency (WUE) typically decreased from maximum values around 30 g CO₂ L⁻¹ soon after sunrise to 2–7 g CO₂ L⁻¹ in the afternoon when vapour pressure deficit typically exceeded 5kPa. While water stress improved instantaneous WUE only slightly, the effect was dramatic for daily values. The measurements allowed the calibration of a model coupling canopy conductance and assimilation that showed a seasonal variation in the parameters suggesting changes in the physiology of olive trees. The improvement of WUE in olive trees under water stress supports the adoption of deficit irrigation in olive orchards although further research is required to prevent negative side effects.