Anthropogenic withdraw of groundwater and climatic drought results in the decline of groundwater depth that, in turn, severely limits the water availability for phreatophytic vegetation in arid regions. In this study, a small xeric, phreatophytic tree Haloxylon ammodendron (C.A. Mey.) was investigated to understand the influence of depth to groundwater (DGW) on hydraulic traits and on the trade-off between drought tolerance and leaf area increment. A suite of traits including leaf water potential, pressure–volume (P–V) curves, Huber value, assimilation branch growth, and osmotic regulation substance were measured across five sites with DGW ranges from 3.45 to 15.91 m. Our results indicate that H. ammodendron was subject to greater water stress with increasing DGW, as indicated by decreased predawn (Ψpd) & midday (Ψmd) branch water potential. We also found that growth rate declined as Huber value increased with increasing DGW in the early growing season (EGS). Solute sugar, as a major osmotic substance, drives decreases in osmotic potential at full turgor, and thus constrains assimilation branch growth with increasing DGW in EGS. Therefore, osmotic adjustment accompanied with water potential regulation (Ψpd－Ψmd) and plasticity of Huber value allows this phreatophyte to absorb water from deeper soil layers and tolerate drought. However, these adaptive adjustments cannot fully compensate for nonoptimal water conditions as growth rate continued to decrease as DGW increased in EGS and even became negative in the late growing season (LGS) at almost all sites. Our results provide an insight into how H. ammodendron responds and adapts to changes DGW in a region experiencing hydrological and climatic drought. Greater depth of groundwater had a significant effect on H. ammodendron and may have similar effects for other non-riparian phreatophytic plants in arid regions.