Forest ecosystems play a crucial role in the global carbon cycle by sequestering a considerable fraction of anthropogenic CO2, thereby contributing to climate change mitigation. However, there is a gap in our understanding about the carbon dynamics of eucalypt (broadleaf evergreen) forests in temperate climates, which might differ from temperate evergreen coniferous or deciduous broadleaved forests given their fundamental differences in physiology, phenology and growth dynamics. To address this gap we undertook a 3-year study (2010-2012) of eddy covariance measurements in a dry temperate eucalypt forest in southeastern Australia. We determined the annual net carbon balance and investigated the temporal (seasonal and inter-annual) variability in and environmental controls of net ecosystem carbon exchange (NEE), gross primary productivity (GPP) and ecosystem respiration (ER). The forest was a large and constant carbon sink throughout the study period, even in winter, with an overall mean NEE of -1234 +/- 109 (SE) g C m(-2) yr(-1). Estimated annual ER was similar for 2010 and 2011 but decreased in 2012 ranging from 1603 to 1346 g C m(-2) yr(-1), whereas GPP showed no significant inter-annual variability, with a mean annual estimate of 2728 +/- 39 g C m(-2) yr(-1). All ecosystem carbon fluxes had a pronounced seasonality, with GPP being greatest during spring and summer and ER being highest during summer, whereas peaks in NEE occurred in early spring and again in summer. High NEE in spring was likely caused by a delayed increase in ER due to low temperatures. A strong seasonal pattern in environmental controls of daytime and night-time NEE was revealed. Daytime NEE was equally explained by incoming solar radiation and air temperature, whereas air temperature was the main environmental driver of night-time NEE. The forest experienced unusual above-average annual rainfall during the first 2 years of this 3-year period so that soil water content remained relatively high and the forest was not water limited. Our results show the potential of temperate eucalypt forests to sequester large amounts of carbon when not water limited. However, further studies using bottom-up approaches are needed to validate measurements from the eddy covariance flux tower and to account for a possible underestimation in ER due to advection fluxes.