Hydraulic theory predicts a positive coupling between leaf hydraulic conductance (K_leaf) and stomatal conductance (g_s); however, this theory has not been fully supported by observations, and underlying mechanisms are poorly understood. Partitioning K_leaf into inside-xylem (K_x) and outside-xylem (K_ox) components offers a refined framework for elucidating the regulation of g_s by leaf hydraulics. While optimal planting density may enhance water use efficiency (WUE) through modulation of g_s, corresponding changes in leaf hydraulic properties and their influence on gas exchange remain unclear. We examined relationships among K_x, K_ox, g_s, leaf photosynthetic rate (A_N), and WUE, and analyzed the structural determinants of K_ox in cotton grown under eight planting densities: 12, 18, 24, 36, 48, 60, 72, and 84 plants m^–2. Results showed that as planting density increased, K_leaf and A_N remained stable, whereas K_ox and g_s declined significantly. Leaf thickness and the volume fraction of inter-cellular air space were key structural factors influencing K_ox. Neither K_leaf nor K_x correlated with A_N or g_s; however, K_ox exhibited a significant positive correlation with g_s. Furthermore, K_ox was negatively correlated with WUE. These findings indicate that K_ox modulates g_s to minimize water loss without compromising A_N, thereby enhancing WUE in cotton across varying planting densities.