Soil water content is a key limiting factor to development and ecological function of artificial poplar plantations in semi-arid area of northern China. To examine the effects of soil drought on a poplar variety Populus×popularis ‘35-44’, 3 soil water levels, i.e., normal (75%±5% of field capacity), moderate drought (50%±5%) and severe drought (25%±5%), were set up using 1 year old cutting seedlings grown in pots. We measured leaf gas exchange parameters, organ dry mass and leaf economic traits both in September 2016 and September 2017 to analyze interannual changes in leaf gas exchange and biomass allocation in an attempt to elucidate the effects of soil water stress and ageing in formation of the "old dwarf trees" phenomenon. Compared with seedlings grown at the normal soil water level, leaf net photosynthetic rates (P_n) of seedlings grown at moderate and severe soil drought levels were reduced by 36.08% and 56.42% in 2016 respectively and also 18.47% and 5.13% in 2017 respectively, mainly due to non-stoma limitation. In first year of soil water drought treatment, stomatal conductance (G_s) and transpiration rate (T_r) of seedlings grown at both soil drought levels decreased significantly. However, no significant decrease of G_s at both soil drought levels were found in second year, while T_r increased at both drought levels significantly, which could be beneficial to transportation of C and N to leaves and therefore maintenance of P_n. In first year of treatment, with increasing severity of soil drought, leaf C/N ratio increased significantly and more biomass was allocated to foliage. However, no significant differences were found in leaf C/N ratio between normal soil water level and moderate soil drought level in second year of treatment, while the decreases of all component biomass at moderate soil drought level in 2017 were less than those in 2016 with a significantly higher root-shoot ratio, indicating that more dry matter were allocated to underground for root construction in acclimation to moderate soil drought. In comparison, more dry matter were allocated to stem at severe soil drought level. After two years of soil drought treatment, water use efficiency (WUE) and photosynthetic nitrogen use efficiency (PNUE) of functional leaves of seedlings decreased significantly, but nitrogen use efficiency at whole plant level (NUE) increased significantly. Increased leaf water consumption, decreased PNUE and increased stem xylem C input of Populus×popularis ‘35-44’ seedlings at severe soil drought level may be the main drivers of "old dwarf trees" phenomenon.