Fluxes of CO2, water vapor, and sensible heat were measured by the eddy covariance method above a young ponderosa pine plantation in the Sierra Nevada Mountains (CA) over two growing seasons (1 June–10 September 1997 and 1 May–30 October 1998). The Mediterranean-type climate of California is characterized by a protracted summer drought, with precipitation occurring mainly from October through May. While drought stress increased continuously over both summer growing seasons, 1998 was wetter and cooler than average due to El Niño climate patterns and 1997 was hotter and drier than average. One extreme 3-day heat wave in 1997 (Days 218–221) caused a step change in the relationship between H2O flux and vapor pressure deficit, resulting in a change in canopy conductance, possibly due to cavitation of the tree xylem. This step change was also correlated with decreased rates of C sequestration and evapotranspiration; we estimate that this extreme climatic event decreased gross ecosystem production (GEP) by roughly 20% (4 μmol C m−2 s−1) for the rest of the growing season. In contrast, a cooler, wetter spring in 1998 delayed the onset of photosynthesis by about 3 weeks, resulting in roughly 20% lower GEP relative to the spring of 1997. We conclude that the net C balance of Mediterranean-climate pine ecosystems is sensitive to extreme events under low soil moisture conditions and could be altered by slight changes in the climate or hydrologic regime.