Phragmites australis is considered the dominant species of wetlands, especially in Northwest China. It plays a very important role in wetland regulation, but little is known about its photosynthetic capacity. Here, we investigated gas exchange parameters, chlorophyll content and dry matter allocation under different watering regimes along the West Lake Wetland of the Hexi Corridor in China. Drought stress significantly decreased PN, E, gs, chlorophyll content (Chl a, Chl b, Chl (a + b), Chl a/b) and augmented Ci, but it also decreased the root, shoot, leaf and total dry matter of P. australis. According to Farquhar and Sharkey (1982), there are both stomatal and nonstomatal limitations to photosynthesis. Stomatal limitation dominates when water stress first occurs, whereas nonstomatal limitation dominates during severe drought. Drought stress lowered Chl a, Chl b, and Chl (a + b), and also the Chl a/b ratio, showing that water stress seriously damages the PSII reaction center in P. australis. Water stress also lowered relative water content (RWC) and water use efficiency (WUE) at 75% water treatment, indicating that P. australis was sensitive under drought stress. The threshold for P. australis at which seedling growth was reduced or even terminated was a decline in RWC to less than 57.58%.