Low nitrogen-use efficiency (NUE) is a serious issue for cotton production and environmental sustainability in arid climates. A pot study was conducted to evaluate the effect of K nutrition on NUE and performance of low- and high-K-efficiency cotton cultivars under two moisture regimes. Treatments included two soil moisture levels—i.e., normal irrigation, 100% available water content (AWC); reduced irrigation, 50% AWC—three levels of nitrogen (N)—i.e., 0, 375, and 750 mg N pot−1—and two K levels, i.e., 0 and 208 mg K pot−1. Results reveal that 208 mg K pot−1 application with nitrogen significantly enhanced the N-use efficiency, growth, and yield attributes of both cotton cultivars compared with sole N fertilization. Similarly, the combined application of NK @ 375 N + 208 K mg pot−1 caused up to 83% increase in NUE under AWC50% and AWC100%, as compared with NK control (0 N + 0 K). Compared with the control, imposed low-moisture stress caused a decrease of 13.9% in stomatal conductance (gs), 2.5% in transpiration rate (E), and 6.5% in net photosynthetic rate (PN), respectively. The physiological water use efficiency (PN/E) decreased by 13.2% under AWC50%. Applied NK @ 375 N:208 K, mg pot−1 caused 27.39 and 27.56% improvement in the PN/E in HKE and LKE cultivars under AWC50%, respectively. The HKE cultivar, i.e., CIM-554, maintained the highest gs and PN than FH-901, that was low-K-efficiency cultivar. The study suggests that varietal selection and adequate K fertilization have the prospects to improve NUE and save considerable quantities of fertilizer and irrigation water in cotton production under arid environments.