To investigate the effect of source and rate of nitrogen fertilizer on yield, water use efficiency and essential oil of peppermint (Mentha piperita L.), an experiment with factorial arrangement in randomized complete block design with three replications was carried out in 2014 and 2015 growing season at the Ramin University of Agriculture and Natural Resources of Khuzestan, Ahvaz, Iran. Nitrogen fertilizer sources including; Urea, Ammonium Sulfate and Urea Ammonium Nitrate (UAN) at the rates; 0, 70, 140, 210 and 280 kg N.ha^-1 were applied. Results showed that fresh yield of peppermint increased in the second year (97.7 kg.ha^-1) was more than the first year (88 kg.ha^-1). Dry yield of peppermint was greater in UAN (25 kg.ha^-1) than Urea (18 kg.ha^-1) and Ammonium Sulfate (16 kg.ha^-1). Genrally, application of UAN fertilizer led to higher essential oil yield and maximum relative essential oil yield in the first and second years in 280 and 210 kg N.ha^-1 treatments. With increasing nitrogen levels, stem nitrogen content increased and in Urea and UAN treatments more nitrogen accumulated in leaves. Water use efficiency was greater in UAN (1.9 g.m^-3) folloewe by Urea (1.4 g.m^-3) and Ammonium Sulfate (1.3 g.m^-3). Maximum economic use efficiency and water productivity in the first and second years were obtained in 280 and 250 kg Nha^-1, respectively. With increasing nitrogen levels, nitrogen use efficiency in the second year (0.34 g.g^-1) was higher than the first year (0.17 g.g^-1). Recovery efficiency of Urea and Ammonium Sulfate decreased, however, application of UAN fertilizer up to 170 kg.ha^-1 increased the recovery efficiency. Physiological efficiency of nitrogen in the Ammonium Sulfate fertilizer was similar in the two years and showed slightly higher than Urea and UAN fertilizers. Results of this experiment showed that application of higher rates of UAN fertilizer in peppermint in Khouzestan had higher efficiency, while nitrogen use efficiency in Urea and Ammonium Sulfate fertilizers was greater at the lower rates.