The increasing carbon dioxide (CO₂) concentration in the atmosphere in combination with climatic changes throughout the last century are likely to have had a profound effect on the physiology of trees: altering the carbon and water fluxes passing through the stomatal pores. However, the magnitude and spatial patterns of such changes in natural forests remain highly uncertain. Here, stable carbon isotope ratios from a network of 35 tree‐ring sites located across Europe are investigated to determine the intrinsic water‐use efficiency (iWUE), the ratio of photosynthesis to stomatal conductance from 1901 to 2000. The results were compared with simulations of a dynamic vegetation model (LPX‐Bern 1.0) that integrates numerous ecosystem and land–atmosphere exchange processes in a theoretical framework. The spatial pattern of tree‐ring derived iWUE of the investigated coniferous and deciduous species and the model results agreed significantly with a clear south‐to‐north gradient, as well as a general increase in iWUE over the 20th century. The magnitude of the iWUE increase was not spatially uniform, with the strongest increase observed and modelled for temperate forests in Central Europe, a region where summer soil‐water availability decreased over the last century. We were able to demonstrate that the combined effects of increasing CO₂ and climate change leading to soil drying have resulted in an accelerated increase in iWUE. These findings will help to reduce uncertainties in the land surface schemes of global climate models, where vegetation–climate feedbacks are currently still poorly constrained by observational data.