Effects of salinity and nutrients on carbon gain in relation to water use were studied in the grey mangrove, Avicennia marina, growing along a natural salinity gradient in south-eastern Australia. Tall trees characterized areas of seawater salinities (fringe zone) and stunted trees dominated landward hypersaline areas (scrub zone). Trees were fertilized with nitrogen (+N) or phosphorus (+P) or unfertilized. There was no significant effect of +P on shoot growth, whereas +N enhanced canopy development, particularly in scrub trees. Scrub trees maintained greater CO2 assimilation per unit water transpired (water-use efficiency, WUE) and had lower nitrogen-use efficiency (NUE; CO2 assimilation rate per unit leaf nitrogen) than fringe trees. The CO2 assimilation rates of +N trees were similar to those in other treatments, but were achieved at lower transpiration rates, stomatal conductance and intercellular CO2 concentrations. Maintaining comparable assimilation rates at lower stomatal conductance requires greater ribulose 1·5-bisphosphate carboxylase/oxygenase activity, consistent with greater N content per unit leaf area in +N trees. Hence, +N enhanced WUE at the expense of NUE. Instantaneous WUE estimates were supported by less negative foliar δ13C values for +N trees and scrub control trees. Thus, nutrient enrichment may alter the structure and function of mangrove forests along salinity gradients.