Andropogon gayanus Kunth. is a large African tussock grass invading Australia's tropical savannas. Invasion results in more intense fires which increases the mortality rate of adult woody plants. Invasion may also affect community structure by altering the recruitment potential of woody plants. We investigated the effects of A. gayanus invasion on ground-level microclimate, and the carbon assimilation potential and recruitment potential of two Eucalyptus species. We compared microclimatic variables from the early wet-season and into the mid-dry season to coincide with the period of growth of A. gayanus. We assessed Eucalyptus recruitment by monitoring seedling establishment, growth and survival of experimentally sown seed, and estimating seedling density resulting from natural recruitment. A. gayanus invasion was associated with increased grass canopy height, biomass and cover. Following invasion, the understorey microclimate had significantly reduced levels of photon flux density, increased air temperatures and vapour pressure deficit. The conditions were less favourable for woody seedling with aboveground biomass of seedlings reduced by 26% in invaded plots. We estimated that invasion reduced daily carbon assimilation of woody seedlings by ~30% and reduced survivorship of Eucalyptus seedlings. Therefore, A. gayanus invasion reduces recruitment potential, contributing to the transformation of savanna to a grassland ecosystem.