AbstractThe frequency and severity of droughts in the Alps are expected to increase due to rising air temperatures and changes in precipitation regimes. Although biomass production in humid mountain areas tends to be energy limited rather than water limited, an increase in droughts may have negative impacts on the water availability and thus agricultural yields. This study aimed to analyse the impacts of dry spells on soil moisture and yield anomalies at a montane permanent grassland site in Austria. Dry spells in the time period from 2018 to 2020 were identified using the Standardized Precipitation Index, Palmer Drought Severity Index and the Soil Moisture Anomaly Index. Data from a lysimeter climate experiment were used to evaluate drought impacts on soil water storage and grassland yield under ambient and manipulated conditions. The results indicated the occurrence of three extreme droughts between 2018 and 2020. Although the studied grassland is generally considered a nonwater‐limited ecosystem, the most extreme drought in summer 2019 caused severe and extreme yield anomalies under ambient and heated conditions. Only mild yield anomalies were observed on plots with elevated atmospheric carbon dioxide concentration. This drought‐mitigating effect was attributed to the water savings enabled by partial stomatal closure under elevated CO2. The shorter dry spells in spring and late summer 2018 led to more diverse effects; mildly to moderately negative yield anomalies were found on the heated plots, whereas the anomalies tended to be less negative or even positive on plots under ambient temperature. In contrast, some time periods without water stress showed positive effects of heating on yield. These findings suggest that drought impacts on a humid montane grassland depend on both water availability and air temperature. Higher air temperature can have positive effects on yield if the ecosystem is energy limited. However, global warming suggests a tendency from energy to water limitation, in which the increased evaporative demand of the atmosphere aggravates soil moisture droughts and thus has potentially negative effects on yield.