Physiological characteristics, growth, and biomass production of rainfed and irrigated bell pepper [Capsicum annuum L. var. anuum (Grossum Group) ‘Quadrato d’Asti’] plants were measured in the semiarid conditions of a Mediterranean summer to determine if drought stress effects are transient and do not affect plant growth and crop yield or are persistent and adversely affect plant growth and crop yield. A low midday leaf water potential indicated the occurrence of transient drought stress episodes in rainfed plants during the first 2 months of the study. Later on, predawn water potential also increased, indicating a persistent drought stress condition despite the occurrence of some rainfall. Photosynthesis was reduced when stress conditions developed, but the reduction was transient and limited to the central part of the day during the first 2 months. As plants aged, however, the impact of drought stress on photosynthesis was not relieved during the overnight recovery period. Stomatal conductance was reduced both during transient and permanent stress conditions while CO2 transfer conductance (i.e., conductance to CO2 inside the leaf) was only reduced when photosynthesis inhibition was unrecoverable. However, chloroplast CO2 concentration was higher in rainfed than in irrigated leaves indicating that CO2 availability was not limiting photosynthesis. Nonphotochemical quenching of fluorescence increased significantly in rainfed leaves exposed to permanent stress indicating the likely impairment of ATP synthesis. Transient inhibition of photosynthesis did not significantly affect leaf area index and biomass production, but growth was significantly reduced when photosynthesis was permanently inhibited. Fruit dry weight was even higher in rainfed plants compared to irrigated plants until drought stress and photosynthesis reduction became permanent. It is suggested that bell pepper growth without supplemental irrigation over the first part of the vegetative cycle does not impair plant growth and may even be useful to improve yield of early fruit.