Mediterranean ecosystems are threatened by climate change and shrub encroachment. An increase in shrub cover can intensify the competition for water, aggravating the impacts of drought on ecosystem functioning. The effects of shrubs can be positive or negative, depending on the shrub species and density. We used a Mediterranean cork oak (Quercus suber) woodland to investigate the effects of increasing gum rockrose (Cistus ladanifer) cover on leaf carbon assimilation (Amax) and tree growth. The experiment consisted of a gradient of shrub cover, with four treatments: control, LD, MD, and HD, with 0%, 25%, 45%, and maximum shrub cover (>90%), respectively. Increasing shrub cover significantly decreased Amax in trees from HD (−15%) compared to control treatment, with intermediate effects on trees from LD (−5%) and MD (−12%). There was a large variability in tree growth, resulting in no significant effects of shrub cover, despite higher trunk diameter relative increments in LD (+40%), and lower in MD (−17%) and HD (−32%) compared to the control. The results indicate that a dense shrub cover (>90%) affected cork oak carbon assimilation and growth, while a low-to-medium shrub cover (≤45%) only induced mild intermediate effects. This information is important for the effective management of shrub density to improve the health and productivity of cork oak woodlands.