AbstractNitrification inhibitors such as dicyandiamide (DCD) may improve N efficiency for cotton (Gossypium hirsutum L.) grown on sandy Coastal Plain soils. Research has demonstrated that cotton is sensitive to DCD, and field experiments suggest a possible link between cotton response to DCD and rainfall distribution. A green‐house experiment was conducted to investigate the effect of DCD and N source on growth and water relations of cotton on a typical Coastal Plain soil. Cotton (Deltapine 90) was grown in pots containing a Norfolk sandy loam (fine‐loamy, siliceous, thermic, Typic Paleudults). Nitrogen (50 mg kg−1) as NaNO3 or urea, and DCD (0, 2.5, 5, 10, 15, and 20 mg DCD‐N kg−1) were applied to the soil at first true leaf. Soil water content, leaf xylem water potential (ψ1), and stomatal conductance were monitored during a 3‐d drying period, commencing at first bloom, following which plants were harvested. Both N source and DCD affected plant growth and water relations, but there were no significant interaction effects. Fertilization with NaNO3 increased leaf dry weight 9.1% compared with fertilization with urea. Plants fertilized with NaNO3 depleted soil moisture faster than plants fertilized with urea, resulting in lowered stomatal conductances and more negative ψ1 throughout the drying period. Dicyandiamide lineraly reduced leaf area and dry weight, and stem dry weight. Dicyandiamide did not affect soil‐water depletion, ψ1, or stomatal conductance in the morning. Under more stressful afternoon conditions, DCD, especially at rates ≥10 mg DCD‐N kg−1, increased stomatal conductance over the range of available soil water. Dicyandiamide‐induced increases in stomatal conductance under conditions of nonlimiting soil water could increase photosynthesis and possibly lint yield. In years when soil water is limiting, however, additional stress from DCD phytotoxicity could result in yield reductions.