Seasonal cycles in stable carbon isotope composition (delta(13)C) were measured within annual rings of Pinus radiata D. Don from trees in two plantation sites which differ markedly in annual water balance. The amplitudes of seasonal delta(13)C variation at the wet and dry sites were 1-2 parts per thousand and 4 parts per thousand respectively. Mean delta(13)C values from the wet site were 3 parts per thousand more C-13 depleted than those from the dry site implying lower water-use efficiency (carbon assimilation per unit transpiration). A process-based, leaf-level model of stomatal conductance and CO2 assimilation was combined with a water balance model to estimate the average daily intercellular CO2 concentration (c(i)). Over two growing seasons at each site there was generally good agreement between mean canopy-level c(i) derived from the tree-ring delta(13)C data and modelled leaf-level c(i) levels. Further, the ratio of annual CO2 assimilation to transpiration estimated by the model for each site correlated with the differences in water-use efficiency between the sites. Carbon isotope discrimination of leaves in the canopy was thus reflected directly in the stem wood, and its dynamic variation within a site, as well as between sites, was driven principally by the interaction of seasonally changing micrometeorological variables and soil water availability.