We examined the importance of temperature (7°C or 15°C) and soil moisture regime (saturated or field capacity) on the carbon (C) balance of arctic tussock tundra microcosms (intact blocks of soil and vegetation) in growth chambers over an 81-day simulated growing season. We measured gaseous CO2 exchanges, methane (CH4) emissions, and dissolved C losses on intact blocks of tussock (Eriophorum vaginatum) and intertussock (moss-dominated). We hypothesized that under increased temperature and/or enhanced drainage, C losses from ecosystem respiration (CO2 respired by plants and heterotrophs) would exceed gains from gross photosynthesis causing tussock tundra to become a net source of C to the atmosphere. The field capacity moisture regime caused a decrease in net CO2 storage (NEP) in tussock tundra micrososms. This resulted from a stimulation of ecosystem respiration (probably mostly microbial) with enhanced drainage, rather than a decrease in gross photosynthesis. Elevated temperature alone had no effect on NEP because CO2 losses from increased ecosystem respiration at elevated temperature were compensated by increased CO2 uptake (gross photosynthesis). Although CO2 losses from ecosystem respiration were primarily limited by drainage, CH4 emissions, in contrast, were dependent on temperature. Furthermore, substantial dissolved C losses, especially organic C, and important microhabitat differences must be considered in estimating C balance for the tussock tundra system. As much as ? 20% of total C fixed in photosynthesis was lost as dissolved organic C. Tussocks stored ? 2x more C and emitted 5x more methane than intertussocks. In spite of the limitations of this microcosm experiment, this study has further elucidated the critical role of soil moisture regime and dissolved C losses in regulating net C balance of arctic tussock tundra.