Shoot water relations were studied in Siberian larch (Larix sibirica Ledeb.) trees growing at the borderline between taiga and steppe in northern Mongolia. Larix sibirica is the main tree species in these forests covering 80% of Mongolia's forested area. Minimum shoot water potentials (Psi(m)) close to the point of zero turgor (Psi(0)) repeatedly recorded throughout the growing season suggest that the water relations in L. sibirica were often critical. The Psi(m) varied in close relation to the atmospheric vapor pressure deficit, whereas Psi(0) was correlated with monthly precipitation. Young larch trees growing at the forest line to the steppe were more susceptible to drought than mature trees at the same sites. Furthermore, isolated trees growing on the steppe exhibited lower Psi(m) and recovered to a lower degree from drought overnight than the trees at the forest line. Indications of drought stress in L. sibirica were obtained in two study areas in Mongolia's forest-steppe ecotone: one in the mountain taiga of the western Khentey in northernmost Mongolia, the other in the forest-steppe at the southern distribution limit of L. sibirica on Mt. Bogd Uul, southern Khentey. Larix sibirica growing in riverine taiga with contact to the groundwater table was better water-supplied than the larch trees growing at the forest line to the steppe. Larch trees from the interior of light taiga forests on north-facing slopes, however, exhibited more critical water relations than the trees at the forest line. Frequent drought stress in mature trees and even more in young larch trees at the forest-steppe borderline suggests that L. sibirica does not have the potential to encroach on the steppe under the present climate, except in a sequence of exceptionally moist and cool years. A regression of the present borderline between forest and steppe is likely to occur, as average temperatures are increasing everywhere and precipitation is decreasing regionally in Mongolia's taiga forest region. Higher stomatal conductance concomitant to lower Psi(m) in trees of northern-slope forests compared to trees from the forest line to the steppe may be the result of a recent increase in drought intensity that affects better drought-adapted trees at the forest edge less than the trees in the forest interior. We conclude that drought is a key factor explaining the forest-steppe borderline in northern Mongolia. The proportion of forests within the present vegetation pattern of forests on north-facing slopes and the grasslands on south-facing slopes in Mongolia's forest-steppe ecotone is not likely to increase under the present climate, but may decrease with increasing aridity due to global warming.