During recent decades, stable oxygen isotopes derived from tree-ring cellulose (δ¹⁸O_TRC) have been frequently utilised as the baseline for palaeoclimatic reconstructions. In this context, numerous studies take advantage of the high sensitivity of trees close to their ecological distribution limit (high elevation or high latitudes). However, this increases the chance that indirect climatic forces such as cold ground induced by permafrost can distort the climate-proxy relationship. In this study, a tree stand of sub-alpine larch trees (Larix decidua Mill.) located in an inner alpine dry valley (Val Bever), Switzerland, was analysed for its δ¹⁸O_TRC variations during the last 180 years. A total of eight L. decidua trees were analysed on an individual base, half of which are located on verified sporadic permafrost lenses approximately 500 m below the expected lower limit of discontinuous permafrost. The derived isotope time series are strongly dependent on variations in summer temperature, precipitation and large-scale circulation patterns (geopotential height fields). The results demonstrate that trees growing outside of the permafrost distribution provide a significantly stronger and more consistent climate-proxy relationship over time than permafrost-affected tree stands. The climate sensitivity of permafrost-affected trees is analogical to the permafrost-free tree stands (positive and negative correlations with temperature and precipitation, respectively) but attenuated partly leading to a complete loss of significance. In particular, decadal summer temperature variations are well reflected in δ¹⁸O_TRC from permafrost-free sites (r = 0.62, p < 0.01), while permafrost-affected sites demonstrate a full lack of this dependency (r = 0.30, p > 0.05). Since both tree stands are located just a few meters away from one another and are subject to the same climatic influences, discrepancies in the isotope time series can only be attributed to variations in the trees' source water that constraints the climatic fingerprints on δ¹⁸O_TRC. If the two individual time series are merged to one local mean chronology, the climatic sensitivity reflects an intermediate between the permafrost-free and –affected δ¹⁸O_TRC time series. It can be deduced, that a significant loss of information on past climate variations arises by simply averaging both tree stands without prior knowledge of differing subsurface conditions.