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Crop productivity, water use efficiency (WUE), and microbial biomass C and N in rainfed dry area are influenced by tillage, rotation, and crop residue management. Field experiments were conducted during 2005-08 to study the effect of tillage, crop rotation, and crop residue retention on oat fodder yield, water use efficiency, and microbial biomass C (MBC) and N (MBN) under semi-arid conditions in north-west Pakistan. The objective of the study was to identify suitable cultural practices and fodder cropping system with improved water use efficiency for a dry area. The treatments consisted of three rotations: i) oat–fallow–oat (O-F-O)-farmers’ practice, ii) oat– summer legume–oat (O-SL-O), and iii) oat–summer cereal–oat (O-SC-O). For each rotation, there were two tillage and two crop residue management treatments: i) Tillage (crop residues removed) and Tillage (crop residues retained), and ii) No-tillage (crop residues removed) and No-tillage (crop residues retained). Basal doses of N₆₀+P₆₀ (kg ha^-1) to oat, N₉₀+P₆₀ to summer cereals and N₂₀+P₆₀ (kg ha^-1) to legumes were applied. Changes in soil water storage were monitored with neutron moisture probe for calculation of WUE. The results indicated that an average maximum dry matter yield (7.78 t ha^-1) and WUE (26.47 kg ha^-1mm^-1) was obtained under no-tillage+crop residues treatment. The tillage practices showed no-significant effect on oat dry matter yield and WUE. The oat yield and WUE was higher in O-F-O rotation compared to O-SL-O and O-SC-O. The surface soil (0-15 cm) analysis showed that MBC and MBN was consistently greater in the no-tillage+crop residues treatment. These results indicated that no-tillage+crop residue treatment was relatively more beneficial under the rainfed (dry) conditions.