Juvenile Eucalyptus grandis were exposed to drought and elevated CO2 to evaluate the independent and interactive effects on growth, gas exchange and wood structure. Trees were grown in a greenhouse at ambient and elevated CO2 (aCO2, 410 ppm; eCO2, 950 ppm), in combination with daily irrigation and cyclic drought during one growing season. The results demonstrated that drought stress limited intercellular CO2 concentration, photosynthesis, stomatal conductance, and transpiration, which correlated with a lower increment in height, stem diameter and biomass. Drought also induced formation of frequent and narrow vessels accompanied by a reduction in vessel lumen area. Conversely, elevated CO2 increased intercellular CO2 concentration as well as photosynthesis, and partially closed stomata, leading to a more efficient water use, especially under drought. There was a clear trend towards greater biomass accumulation at eCO2, although the results did not show statistical significance for this parameter. We observed an increase in vessel diameter and vessel lumen area at eCO2, and, contrarily, the vessel frequency decreased. Thus, we conclude that eCO2 delayed the effects of drought and potentialized growth. However, results on vessel anatomy suggest that increasing vulnerability to cavitation due to formation of larger vessels may counteract the beneficial effects of eCO2 under severe drought.