• Hereditary symbioses between fungal endophytes and grasses are relatively recent in the history of plant life. Given < 80 million yr of co-evolution, symbioses are likely to have impacted plant microevolutionary rather than macroevolutionary processes. Therefore, we investigated the microevolutionary role of the fungal endophyte Neotyphodium lolii in theadaptive differentiation of its host species Lolium perenne. • Endophyte frequency in 22 natural L. perenne populations was established across a water availability gradient. Adaptive differentiation among five populations, and between symbiotic (S) and nonsymbiotic (NS) plants, was examined in a glasshouse experiment under nonlimiting and limiting water conditions. Genetic differentiation was subsequently assessed among populations, and between S and NS individuals, using 14 simple sequence repeats (SSR). • Symbiosis frequencies were positively correlated to water availability. Adaptive populationdifferentiation occurred following a trade-off between biomass production under nonlimiting water conditions and survivorship under water stress. Endophytic symbiosis increased plant survival in xeric populations, and reinforced competitiveness in mesic populations. No genetic difference was detected between S and NS plants within populations. Therefore, we conclude that the endophyte relationship is responsible for these effects. • Local adaptation of the host plant, appears to be supported by the fungal endophyte.