A field study was carried out in the high rainfall zone (HRZ, >600 mm p.a.) of southern Australia from March 1994 to August 1997 to test the hypothesis that sown perennial grasses and liming could make the existing pastures more sustainable through better use of water and nitrogen. The site, on an acid duplex soil at Book Book near Wagga Wagga in southern New South Wales, was typical of much of the HRZ grazing country in southern New South Wales and north-east Victoria. The experiment consisted of 4 replicate paddocks (each 0.135 ha) of 4 treatments: annual pasture (mainly ryegrass Lolium rigidum, silver grass Vulpia spp., subterranean clover Trifolium subterraneum and broadleaf weeds) without lime, annual pasture with lime, perennial pasture (phalaris Phalaris aquatica, cocksfoot Dactylis glomerata and subterranean clover T. subterraneum) without lime, and perennial pasture with lime. Soil pH (0–10 cm) in the limed treatments was maintained at 5.5 (0.01 mol/L CaCl2), compared to 4.1 in the unlimed treatments. The pastures were rotationally grazed with Merino ewe or wether hoggets at a stocking rate which varied with the season, but was 10–25% higher on the limed pastures [14.8–17.3 dry sheep equivalent (dse)/ha] than the unlimed pastures. One replicate set of pasture treatments was intensively monitored for surface runoff, subsurface flow (at the top of the B horizon), water potential gradients and ammonium volatilisation. Other measurements of nitrogen inputs, transformations and losses were made on all paddocks. In a normal to wet year, surface runoff, subsurface flow and deep drainage (>180 cm depth) were about 40 mm less from the perennial than the annual pastures. The reduction in deep drainage under the perennials was about one-third to one-half (20–29 mm/year). The smaller loss of solution NO3– from the perennial pastures (up to 12 kg N/ha.year) suggested soil acidification under perennials was reduced by about 1 kmol H+/ha.year. Denitrification and volatilisation losses of N were small (1–12 kg N/ha.year). Nitrogen fixed by subterranean clover (above ground parts) ranged from 2–8 kg N/ha in the drought of 1994–95 to 128 kg N/ha in a normal year (1996). The soil-pasture nitrogen balance was positive for all treatments and averaged 76 kg N/ha.year over 2 years. The abundance of introduced and native earthworms increased from 85 to 250/m2 in the limed pastures between 1994 and 1997. Introduced species, such as Aporrectodea trapezoides, were especially responsive to lime. Animal production per hectare was 10–25% higher on pastures with lime. Critical gross margins per dse were lowest ($16/ha) for a long-lived perennial pasture (>15 years), and highest ($20/ha) for a short-lived perennial (5 years). Overall, there were substantial benefits in animal production, improved soil quality and water use from establishing perennial grass pastures with lime on these strongly acid soils.