Forest carbon and water fluxes are often assumed to be coupled as a result of stomatal regulation during dry conditions. However, recent observations have indicated increased transpiration rates during isolated heat waves across a range of eucalypt species under experimental and natural conditions, with inconsistent effects on photosynthesis (ranging from an increase to a near total decline). To improve the empirical basis for understanding carbon and water fluxes in forests under hotter and drier climates, we measured the water use of dominant trees, and the ecosystem-scale carbon and water exchange in a mature temperate eucalypt forest over three summer seasons. The forest maintained photosynthesis within 16% of peak photosynthesis rates during all conditions, despite up to 70% reductions in canopy conductance during a 5-day heatwave. While carbon and water fluxes both decreased by 16% on exceptionally dry summer days, GPP was sustained at the cost of up to 74% increased water loss on the hottest days and during the heatwave. This led to ~40% variation in ecosystem water use efficiency over the three summers, and ~two-fold differences depending on the way water use efficiency is calculated. Furthermore, the forest became a net source of carbon following a 137% increase in ecosystem respiration during the heat wave, highlighting that the potential for temperate eucalypt forests to remain net carbon sinks under future climates will depend not only on their potential to maintain photosynthesis during higher temperatures, but also on responses of ecosystem respiration to changes in climate.