The different abilities of plant species to use ephemeral or permanent water sources strongly affect physiological performance and species coexistence in water-limited ecosystems. In addition to withstanding drought, plants in coastal habitats often have to withstand highly saline soils, an additional ecological stress. Here we tested whether observed competitive abilities and C-water relations of two interacting shrub species from an arid coastal system were more related to differences in root architecture or salinity tolerance. We explored water sources of interacting Juniperus phoenicea Guss. and Pistacia lentiscus L. plants by conducting physiology measurements, including water relations, CO2 exchange, photochemical efficiency, sap osmolality, and water and C isotopes. We also conducted parallel soil analyses that included electrical conductivity, humidity, and water isotopes. During drought, Pistacia shrubs relied primarily on permanent salty groundwater, while isolated Juniperus plants took up the scarce and relatively fresh water stored in upper soil layers. As drought progressed further, the physiological activity of Juniperus plants nearly stopped while Pistacia plants were only slightly affected. Juniperus plants growing with Pistacia had stem-water isotopes that matched Pistacia, unlike values for isolated Juniperus plants. This result suggests that Pistacia shrubs supplied water to nearby Juniperus plants through hydraulic lift. This lifted water, however, did not appear to benefit Juniperus plants, as their physiological performance with co-occurring Pistacia plants was poor, including lower water potentials and rates of photosynthesis than isolated plants. Juniperus was more salt sensitive than Pistacia, which withstood salinity levels similar to that of groundwater. Overall, the different abilities of the two species to use salty water appear to drive the outcome of their interaction, resulting in asymmetric competition where Juniperus is negatively affected by Pistacia. Salt also seems to mediate the interaction between the two species, negating the potential positive effects of an additional water source via hydraulic lift.