AbstractDiurnal courses of leaf water potential (Ψl), gas exchange and chlorophyll fluorescence were measured in natural sun and shade populations ofHeteromeles arbutifoliathroughout the seasons of an unusually dry El Niño year in Central California. The onset of drought resulted in decreased stomatal conductance and net photosynthesis in both sun and shade plants. However, the decline inΨlwas much greater and carbon gain was much more strongly limited by the development of drought stress in the shade than in the sun. Photorespiratory energy dissipation was significantly higher in the sun than in the shade in spring and autumn, but not during the summer. Pre‐dawn photochemical efficiency (Fv/Fm) was significantly higher in the shade than in the sun during the spring but the differences disappeared during the summer and autumn. The strong irradiance in the open field site studied led to a chronic but only mild reduction inFv/Fm, with values around 0·79. Summer sunflecks led to a sustained photo‐inhibition in shade plants, which exhibited a significant reduction in pre‐dawnFv/Fmof 10% with the onset of drought. Photo‐inhibition became relatively more important for carbon gain in the shade than in the sun due to the low photochemical efficiency under the low light that follows sunflecks. Sun plants ofH. arbutifoliaexhibited a rather efficient photoprotection against strong irradiance conferred by both the architecture of the crown and the physiology of the leaves. There is evidence that El Niño events and the associated droughts have become more frequent and severe. Counter‐intuitively, the effects on plant performance of such extreme droughts could be more critical in the shade than in the sun.