Gene action, general (GCA) and specific (SCA) combining ability of transpiration efficiency and morphophysiological traits were studied in a half diallel cross of bread wheat. Eight bread wheat genotypes and their 28 F1 hybrids were evaluated under favorable and drought-stressed field conditions. Highly significant differences were observed among studied genotypes for all traits under favorable and drought stress conditions. Highly significant mean squares due to GCA and SCA effects were observed for all the traits under favorable and drought stress conditions, with GCA mean squares being much larger than that of SCA, except stomata frequency under drought stress. Both additive and non-additive gene actions were involved in the inheritance of studied traits, with a predominance of the additive gene action. Compared to their parents, F1 hybrids showed higher transpiration efficiency under drought stress. The regression analysis of transpiration efficiency indicating full adequacy of an additive-dominance model under favorable (b= 0.94±0.08) and drought stress (b= 0.96±0.27) conditions. A highly significant positive correlation (r= 0.44, P<0.01) was observed between transpiration efficiency and grain yield per plant under drought stress, indicating the usefulness of transpiration efficiency as an effective selection criterion for drought tolerance. The parents P5 ‌(Sids-14) followed by P8 (Misr-2) and and P7 ( L.1x15) were identified as the best general combiners, and five crosses (P1×P5, P3×P4, P4×P7, P6×P7 and P6×P8) were the best promising combinations for transpiration efficiency under drought stress. Thus, inclusion of these superior genotypes into breeding programs could be useful for improvement of drought tolerance in wheat.