General and specific combining ability, and gene effect under drought stress in six lines and two cultivars of bread wheat were studied in an 8×8 parent diallel design. The 28 F1 hybrids and the eight parental lines were sown in a complete randomized block design with three replications at the Research Field of Agriculture Faculty of the University of Tehran during 2000-2001. Plant height, heading date, awn length, spike length, number of grains per spike, 500 kernel weight and grain yield were evaluated. Preliminary analysis of variance showed that differences due to genotypes were significant for all the traits. Diallel analysis was conducted using the mixed B model of method two of Griffing. The effect of general combining ability (gca) were highly significant for all the traits, while the specific combining ability (sca) effects were highly significant for all the traits except the spike length. The MS(GCA)/MS(SCA) was significant for all traits excluding the plant height. It was observed that the majority of the genetic variance in grain yield as well as yield components were due to additive gene action. Because of the high additive genetic variance of measured traits, heritability and the probability of successful selection of these characters is high.