Water stress limits plant survival and production in many parts of the world. Identification of genes and alleles responding to water stress conditions is important in breeding plants better adapted to drought. We used RNA sequencing (RNA-seq) to identify the candidate genes and alleles and to explore the evolutionary signatures of selection. We studied the effect of water stress on gene expression in Eucalyptus camaldulensis seedlings derived from three natural populations. Using de novo assembly and ab initio transcriptome mapping we identified several genes with differential expression between control and stress conditions. Several single nucleotide polymorphisms (SNPs) showed differential allelic expression between control and water stressed seedlings. Allelic expression of 70% of these variants was correlated with total gene expression. Proportions of nonsynonymous to synonymous substitution rates (Ka/Ks) were used to study selection patterns. Among the positively selected genes apoptosis and cell death categories were enriched. Several of the positively selected genes showed differential expression and a few SNPs from positively selected genes showed differential allelic expression between treatments. In three genes expression of one of the two alleles of an SNP was completely suppressed under control conditions while both alleles were expressed under stress conditions. In addition to previously characterised genes this study revealed several unknown or novel water stress genes. Correlation of allelic expression of several SNPs with total gene expression indicates that these variants may be the cis-acting variants or in linkage disequilibrium with such variants. Enrichment of apoptosis and cell death gene categories among the positively selected genes reveals the past selection pressures experienced by the populations used in this study.