Increases in woody vegetation and declines in grasses in arid and semi-arid ecosystems have occurred globally since the 1800s, but the mechanisms driving this major land-cover change remain uncertain and controversial. Working in a shrub-encroached grassland in the northern Chihuahuan Desert where grasses and shrubs typically differ in leaf-level nitrogen allocation, photosynthetic pathway, and root distribution, we asked if differences in leaf level ecophysiology could help explain shrub proliferation. We predicted that the relative performance of grasses and shrubs would vary with soil moisture due to the different morphological and physiological characteristics of the two life-forms. In a 2-year experiment with ambient, reduced,and enhanced precipitation during the monsoon season, respectively, the encroaching C3 shrub (honey mesquite Prosopis glandulosa) consistently and substantially outperformed the historically dominant C4 grass (black grama Bouteloua eriopoda) in terms of photosynthetic rates while also maintaining a more favorable leaf water status. This data set includes leaf water potential for each leaf measured while data on photosynthetic rates can be found in package 210409001. This study is complete. Please refer to: Throop, H., Archer, S. R. , and L. G. Reichmann. 2011. Response of dominant grass and shrub species to water manipulation: an ecophysiological basis for shrub invasion in a Chihuahuan Desert Grassland. Oecologia 169: 373-383.