The effect of the systemic seed-borne endophyte Epichloë gansuensis on the colonization by Blumeria graminis, the cause of powdery mildew disease, and the growth of the host grass Achnatherum inebrians, was studied under four soil water conditions. Infection incidence, disease lesion parameters, disease index, biomass production and growth parameters of the grass with and without the fungal endophyte were measured and counted after a period of disease. There was a significantly (P < 0.05) higher disease incidence and disease index for endophyte-free (E−) compared to endophyte-infected (E+) plants under different drought stresses. The presence of the endophyte significantly positively affected all of the host grass growth factors. The results of the present study demonstrate that the presence of the Epichloë endophyte reduced the ability of B. graminis to colonise A. inebrians and also conferred enhanced host plant growth at all soil water conditions tested.