The genus Eucalyptus occupies a broad ecological range, forming the dominant canopy in many Australian ecosystems. Many Eucalyptus species are renowned for tolerance to aridity, yet inter-specific variation in physiological traits, particularly water relations parameters, contributing to this tolerance is weakly characterized only in a limited taxonomic range. The study tests the hypothesis that differences in the distribution of Eucalyptus species is related to cellular water relations. Six eucalypt species originating from (1) contrasting environments for aridity and (2) diverse taxonomic groups were grown in pots and subjected to the effects of water deficit over a 10-week period. Water potential, relative water content and osmotic parameters were analysed by using pressure-volume curves and related to gas exchange, photosynthesis and biomass. The six eucalypt species differed in response to water deficit. Most significantly, species from high rainfall environments (E. obliqua, E. rubida) and the phreatophyte (E. camaldulensis) had lower osmotic potential under water deficit via accumulation of cellular osmotica (osmotic adjustment). In contrast, species from low rainfall environments (E. cladocalyx, E. polyanthemos and E. tricarpa) had lower osmotic potential through a combination of both constitutive solutes and osmotic adjustment, combined with reductions in leaf water content. It is demonstrated that osmotic adjustment is a common response to water deficit in six eucalypt species. In addition, significant inter-specific variation in osmotic potential correlates with species distribution in environments where water is scarce. This provides a physiological explanation for aridity tolerance and emphasizes the need to identify osmolytes that accumulate under stress in the genus Eucalyptus.