Two soils of the Katherine region of the dry monsoonal area of northwestern Australia were incubated at −2.7, −5, −15, −20, −35, and −50 bars water potential for three and six weeks under strict temperature and soil water control conditions. The amounts of nitrate and ammonium formed between three and six weeks incubation were regarded as a good measure of the effect of the different water potentials on organic nitrogen mineralization. Nitrate formation ceased at −24.3 bars in Tippera clay loam and at −50 bars in Manbulloo sand. Ammonium formation was increased up to −50 bars. The results for Tippera clay loam suggest that there are micro-organisms which utilize ammonium nitrogen at high water potential, but their activity is decreased at a higher water potential than that of the ammonium formers. The implications of the results are discussed in relation to high soil nitrogen availability at the beginning of the wet season.