Since European settlement, woodlands have undergone significant structural and compositional changes in semi-arid SE Australia. With logging, introduced grazing and declines in fire frequency, fire-sensitive Callitris glaucophylla has regenerated densely in woodlands dominated by C. glaucophylla and fire-tolerant Eucalyptus species. Since little is known about long-term competitive interactions between sapling regeneration and canopy trees, we examined: (1) how established Eucalyptus and Callitris canopy trees influence survival, growth and reproduction of Callitris saplings; (2) whether dense Callitris regeneration affects canopy tree health during drought; (3) and whether these patterns differ along a rainfall gradient (363 ' 621 mmyr-1). Callitris saplings beneath tree canopies were less dense, smaller, and less likely to fruit than isolated saplings in gaps along the rainfall gradient. Callitris trees surrounded by Callitris regeneration had greater mortality than those without surrounding regeneration; Eucalyptus trees were more likely to be drought stressed at the lower end of the rainfall gradient, where canopy trees were at higher densities. The results suggest that canopy trees reduce the density rather than exclude Callitris regeneration, and that the regeneration contributes to mortality of Callitris canopy trees during drought. The trend towards increasing Callitris dominance is expected to continue over time, owing to the paucity of Eucalyptus recruitment.