Water and nitrogen management are crucial for food security and the efficient use of water and fertilizer, especially in arid regions. Three irrigation levels, namely, 80% crop water requirement (ETC) (W1), 100% ETC (W2), and 120% ETC (W3), and three nitrogen application levels, namely, 0 kg/ha (N1), 207 kg/ha (N2), and 276 kg/ha (N3), were used as the experimental treatments, and a control group, denoted as CK, was created. The results show that the maximum height achieved was 82.16 cm under W3N3. There was a single-peak variation trend throughout the growth stages of SPAD. It peaked at 58.44 under W3N3 and then at 27.9 under W2N2. The net photosynthetic and transpiration rates displayed bimodal peaks and the phenomenon of a “photosynthetic midday depression”. And the prominent peaks in leaf water use efficiency occurred at 14:00 and 18:00, alongside noteworthy enhancements observed under the W3 treatment. Water and nitrogen and their interactions significantly affected the dry matter (DM) of winter wheat, with the spike accounting for the highest percentage. The W2N2 treatment demonstrated superior effectiveness in enhancing winter wheat water use efficiency, offering the potential to decrease irrigation requirements by 20% and nitrogen application by 25%. Moreover, the maximum PFPN attained under W2N2 reached 60.13, representing a noteworthy 35.25% increase compared to the control group (CK), but the HI of the W2N2 treatment only reached 0.56. The highest HI was achieved with W3N2 (0.73), and the nitrogen application of 207 kg/ha was more conducive to obtaining a higher HI. The highest yield was achieved under W3N3 (13.599 t/ha), followed by W2N2 (12.447 t/ha), and the spike proportion exceeded 60% with W2N2, and its production cost and economic benefit ratio of under 0.31 were superior to those for other treatments. Multiple regression analysis revealed that the maximum yield reached 12.944 t/ha with an irrigation amount of 3420.1 m3/ha and a nitrogen application of 251.92 kg/ha. Overall, our study suggests using an optimal water–nitrogen combination, specifically an irrigation level of 2829 m3/ha and a nitrogen application rate of 207 kg/ha, leading to increased winter wheat yields and economic benefits. These research results provide a pragmatic technique for improving winter wheat production in southern Xinjiang.