The savanna vegetation of Brazil (Cerrado) accounts for 20–25% of the land cover of Brazil and is the second largest ecosystem following Amazonian forest; however, Cerrado mass and energy exchange is still highly uncertain. We used eddy covariance to measure the net ecosystem CO2 exchange (NEE) of grass‐dominated Cerrado (campo sujo) over 3 years. We hypothesized that soil water availability would be a key control over the seasonal and interannual variations in NEE. Multiple regression indicated that gross primary production (GPP) was positively correlated (Pearson's r = 0.69; p < 0.001) with soil water content, radiation, and the Moderate Resolution Imaging Spectroradiometer (MODIS)‐derived enhanced vegetation index (EVI) but negatively correlated with the vapor pressure deficit (VPD), indicating that drier conditions increased water limitations on GPP. Similarly, ecosystem respiration (Reco) was positively correlated (Pearson's r = 0.78; p < 0.001) with the EVI, radiation, soil water content, and temperature but slightly negatively correlated with rainfall and the VPD. While the NEE responded rapidly to temporal variations in soil water availability, the grass‐dominated Cerrado stand was a net source of CO2 to the atmosphere during the study period, which was drier compared to the long‐term average rainfall. Cumulative NEE was approximately 842 gC m−2, varying from 357 gC m−2 in 2011 to 242 gC m−2 in 2012. Our results indicate that grass‐dominated Cerrado may be an important regional CO2 source in response to the warming and drying that is expected to occur in the southern Amazon Basin under climate change.