Tree seedling establishment, survival and growth in dryland areas is greatly impacted by water, land use effects and soil nutrient availability. Arbuscular mycorrhizal fungi (AMF) can have a substantial effect on water and nutrient uptake by seedlings and are affected by nutrient application, water availability and inoculum source. In this study, we examined the effect of AMF inoculation, phosphorus application levels, soil water status, and inoculum source on the growth of Faidherbia albida seedlings. Two greenhouse experiments were conducted on F. albida seedlings: to compare (a) ±AMF inoculation, at three levels of volumetric soil water content (field capacity (FC), 60% of FC and 20% of FC), and three AMF inoculum sources (derived from cultivated land, grazing land and area exclosure); (b) ±AMF inoculation, at four levels of phosphorus application (0, 25, 50 and 100 mg kg−1) and three AMF inoculum sources. Inoculation with AMF, higher soil water and higher P application significantly increased the growth of seedlings (P < 0.05). F. albida seedlings responded positively to increased water levels. The highest growth and AMF colonization of seedlings was recorded under the lowest water stress with AMF inoculum from area exclosure followed by grazing land inoculum source. The lowest growth was recorded under the highest water stress and cultivated land inoculum source. Plant growth and biomass were positively correlated with increased soil P application, however, AMF colonization decreased with increasing P application. Applying P and inoculating F. albida seedlings with indigenous AMF under low water stress enables optimum plant growth improvement in dryland farming systems.