Guayule (Parthenium argentatum Gray, cv. N565 II), a drought tolerant, rubber‐producing shrub native to the desert Southwest, was grown in field plots at Phoenix, AZ, in an Avondale loam soil [fine, loamy, mixed (calcareous), hyperthermic Typic Torrifluvent] in well‐watered and drought conditions. The purpose of the investigation was to characterize the relationships between plant water relations, photosynthesis, and rubber content during drought stress to improve water management practices. The drought treatment lasted 70 days (29 May–5 Aug. 1986) during which the soil moisture content gradually declined from 340 to 165 mm in the top 1.1 m of soil. The well‐watered plots were maintained at greater than 260 mm soil moisture per 1.1 m of soil. Values for psychrometric measurement of water potential of the stressed plants declined to −3.0 MPa, 1.2 MPa less than the well‐watered plants, while maintaining approximately equal and positive pressure potential. This suggests an important role for osmotic adjustment in the drought tolerance of guayule. Net photosynthesis in both treatments steadily declined from about 10.0 to 3.5 µMol m−2 s−1 during the experiment, but with no apparent inhibition due to drought stress. Rubber content increased over fivefold in the stressed plants (from 0.4 to 2.1%) and doubled in the well‐watered plants (from 0.4 to 0.8%) over the course of the experiment. However, the stress treatment reduced final plant size, based on plant height and width measurements, by approximately one‐third compared to the well‐watered treatment. Controlled periods of stress should be investigated as a potential management tool to increase rubber content as well as reduce irrigation water requirements.