Genetic analysis of cotton germplasm was conducted to investigate its potential to develop water stress tolerance in future varieties. Four tolerant NIAB-78, CIM-482, BH-121, VH-142, and four susceptible, CIM-446, FH-1000, FH-900 and FH-901 lines were identified out of 50 accessions based on their seedling root length. A complete set of diallel crosses among eight selected genotypes was genetically analysed following Hayman(1954) and Jinks(1954). Seedling traits like shoot length , Root length , Fresh shoot weightand Dryshoot weight were studied in the green house whereas yield and fibre property traits were analysed at field level. Three physiological traits like plasma membrane stability, leaf relative water content and excise leaf water loss were also studied at field level. Both Additive and non-additive genetic variances were involved in the inheritance mechanisms of all the seedling as well as agronomic and physiological traits under normal and water stress conditions. A large Proportion of genetic variance was of additive type which was further supported by high narrow sense heritability estimates of characters .Variance vs covariance graphic representations also depicted additive type of gene action with partial dominance and absence of non-allelic interaction in the inheritance of the traits. The parents identified as drought tolerant expressed good GCA effects and gave promising cross combinations as far as yield , its components and fibre property traits were concerned. The results of the studies suggested that cotton genotypes can be improved for drought tolerance through crosses among tolerant genotypes using conventional selection procedures in the segregating generations.