Climate change has been reported to affect shrub growth positively at several sites at high northern latitudes, including several arctic environments. The observed growth rates are, however, not uniform in space and time, and the mechanistic drivers of these patterns remain poorly understood. Here we investigated spatio-temporal interactions between climatic conditions, xylem anatomical traits, and annual growth of 21 Betula nana L. individuals from western Greenland for the period 2001-2011. Structural equation modeling showed that summer precipitation and winter temperature are affecting annual growth positively. Furthermore, vessel lumen area and vessel grouping, which are related to water conductivity and hydraulic connectivity of the xylem, respectively, positively influenced annual growth. To optimize growth B. nana was thus able to adjust its water transporting system. Annual variation in vessel lumen area seemed to be driven mostly by spring and summer temperatures, whereas annual variation in vessel grouping was driven by winter temperature. Linear models did not reveal a pattern in the spatial variation of xylem anatomical traits across the sampled climatic gradient. However, growth was positively correlated with local variation in insolation. Our results suggest that B. nana can adjust its hydraulic capacity to annual fluctuations in climatic conditions in order to optimize its total radial stem growth rate.