Soil amendment with biochar is being considered as a strategy for improving available soil water and nutrient content and, thereby, plant performance. Our aim was to investigate whether physiological, biochemical and morphological responses of Eucalyptus globulus to biochar amendment were dependent on watering regime. We conducted a randomized, 6-week greenhouse experiment with 5-month old eucalypt rooted cuttings in sandy soil, with the factors: ‘biochar application rate’ (0% and 4%, ww−1), ‘watering regime’ (20% and 80% of maximum soil water holding capacity; MWHC) and ‘fertilization’ (with and without). Increased plant physiological responses to biochar were the most pronounced under water-limited and unfertilized conditions, with a significant increase in leaf water use efficiency (WUE; + 40%), net photosynthetic rate (+ 60%) and plant survival rate (+ 33%), while plant biomass was unchanged. Under water-limited and fertilized conditions, we found no significant biochar effects, except for a small reduction in photochemical and non-photochemical quenching (qP and NPQ, respectively). Under well-watered and fertilized conditions, biochar did not affect leaf WUE or total biomass but reduced the number of branches (− 30%) and photosynthetic rate (− 24%). Finally, under well-watered and unfertilized conditions, biochar was associated with apical leaf deformation, indicating potential micronutrient deficiency, as well as an increase in total soluble sugars and a decrease in stomatal conductance. While the observed benefits suggest that a woody biochar may be advantageous in managing un-irrigated eucalypt plantations, particularly during the planting period, the occurrence of trade-offs urges for long-term studies that account for different dynamic watering regimes, biochar types and application rates, as well as soil–plant-biochar-climate combinations.