Treated wastewater (TWW) is a major source of water for agriculture in Israel; however, recent reports indicate a marked yield loss in TWW-irrigated avocado and citrus orchards planted in clayey soils. The association of the yield loss with clayey soils rather than sandy soils suggests that it is associated with conditions in the root zone, and specifically poor aeration. A three-year study (2012–2015) was conducted in an avocado orchard planted in clayey soil, comparing the oxygen and redox conditions in the root zone of TWW-irrigated plots with fresh water (FW)-irrigated plots, together with the physiological status of the trees. Soil parameters included: continuous in-situ measurement of soil-water tension (SWT), soil oxygen, and soil redox potential, and periodic measurements of soil solution composition. Physiological parameters included: mineral composition of plant tissue from the leaves, trunk xylem and roots, root growth, yield, fruit setting, plant volume, and yield. TWW-irrigated plots were found to endure longer periods of low SWT indicating higher water content, accompanied by lower oxygen levels and more reduced conditions in comparison to FW-irrigated plots. The differences in these soil parameters between treatments were greater during the irrigation season than during the rainy period. The more reduced conditions in the TWW plots did not lead to significant differences in Fe or Mn concentrations in the soil solution or in plant leaves. TWW soil solution had significantly higher Na levels compared with FW. This did not affect the leaf Na content, but was expressed in substantially higher Na content in the root and trunk xylem, with up to seven times more trunk xylem Na in TWW-irrigated plants compared with FW-irrigated plants. Root growth was significantly hindered in TWW-irrigated plots compared with FW-irrigated plots. A negative correlation was found between root growth and the duration of hypoxic conditions, and similarly between root growth and the Na levels in the roots. TWW-irrigated plants had greater fruitlet numbers at the initial fruit-setting stage, but had a smaller number of fruit and a lower yield at harvest. The yield (kg/tree) negatively correlated with the duration of hypoxic conditions in the root zone but not with the Na levels in the roots or xylem. Our findings point towards a substantial role of oxygen deprivation as a major factor leading to the damage to TWW-irrigated orchards in clayey soils. Based on the assimilation of data, we suggest that a downward cascade is instigated in the TWW-irrigated orchards by increased input of Na into the soil, leading to degradation of soil hydraulic properties and reduced aeration. Impaired physiological functioning of the roots due to limited oxygen supply results in less roots growth, lower water uptake and impaired selectivity against Na uptake, thus imposing a negative feedback to increase soil water content, reduce aeration and root-zone oxygen availability for the roots, and further impair plant resistance to the high Na levels.