To investigate the physiological basis of salt adaptation in poplar, we compared the effect of salt stress on wood anatomy and auxin physiology of the salt-resistant Populus euphratica and salt-sensitive Populus x canescens. Both poplar species showed decreases in vessel lumina associated with increases in wall strength in response to salt, however, in P. euphratica at three-fold higher salt concentrations than in P. x canescens. The predicted hydraulic conductivity of the wood formed under salt stress decreased in P. x canescens, while in P. euphratica, no significant effects of salt on conductivity and transpiration were observed. The concentration of free indole-3-acetic acid (IAA) decreased under salt stress in the xylem of both poplar species, but to a larger extent in P. x canescens than in P. euphratica. Only salt-treated P. euphratica exhibited an increase in IAA-conjugates in the xylem. Genes homologous to the auxin-amidohydrolase ILL3 were isolated from the xylems of P. euphratica and P. x canescens. For functional analysis, the auxin-amidohydrolase from P. x canescens was overexpressed in Arabidopsis. Transgenic Arabidopsis plants were more resistant to salt stress than the wild-type plants. Increased sensitivity of the transgenic Arabidopsis to IAA-Leu showed that the encoded hydrolase used IAA-Leu as a substrate. These results suggest that poplar can use IAA-amidoconjugates in the stem as a source of auxin to balance the effects of salt stress on auxin physiology.