Attempts to improve water use efficiency in regions with Mediterranean climates generally focus on increasing plant transpiration relative to evaporation from the soil and increasing transpiration efficiency. Our aim was to determine if transpiration efficiency differs among key species occurring in annual pastures in southern Australia. Two glasshouse experiments were conducted with three key pasture species, subterranean clover (Trifolium subterraneum L.), capeweed [Arctotheca calendula (L.) Levyns] and annual ryegrass (Lolium rigidum Gaudin), and wheat (Triticum aestivum L.). Transpiration efficiency was assessed at the levels of whole-plant biomass and water use (W), leaf gas exchange measurements of the ratio of CO2 assimilation to leaf conductance to water vapour (A/g), and carbon isotope discrimination (Δ) in leaf tissue. In addition, Δ was measured on shoots of the three pasture species growing together ill the field. In the glasshouse studies, annual ryegrass had a consistently higher transpiration efficiency than subterranean clover or capeweed by all methods of measurement. Subterranean clover and capeweed had similar transpiration efficiencies by all three methods of measurement. Wheat had W values similar to ryegrass but A/g and Δ values similar to subterraneall clover or capeweed. The high W of annual ryegrass seems to be related to a conservative leaf gas exchange behaviour, with lower assimilation and conductance but higher A/g than for the other species. In contrast to the glasshouse results, the three pasture species had similar A values when growing together in mixed-species swards ill the field. Reasons for these differing responses between glasshouse and field-grown plants are discussed in terms of the implications for improving the transpiration efficiency of mixed-species annual pasture communities in the field.