Eucalyptus is the tree of choice for wood production by farmers in Ethiopia. Although there are many claims about its harmful effect on ecology and water availability, little actual research exists. The main objective of this study was, therefore, to study the extent of harm of Eucalyptus on the ecosystem. This study was conducted at the Koga Watershed near Lake Tana in Ethiopia. Twenty-five farmers were interviewed and a field experiment with three replications was carried out to quantify the effect of Eucalyptus on various soil physical and chemical properties and maize crop measurements and to compare bulk density, soil moisture contents, maize crop counts and shading effects in fields bordered by Eucalyptus and Croton macrostachyus. Our results show that Eucalyptus decreased both soil nutrients and maize yields within 20 m of the trees. Although moisture content was not affected during the monsoon, it decreased faster within 30 m of the Eucalyptus trees than elsewhere. Soils become water repellent, too. Local farmers’ perception agreed with our experimental findings and indicated that Eucalyptus trees are exhausting the once productive land. They also reported that Eucalyptus dries up springs. Despite this, the growers insist on planting Eucalyptus because of its cash income.