While shifts from coral to seaweed dominance have become increasingly common on coral reefs and factors triggering these shifts successively identified, the primary mechanisms involved in coral-algae interactions remain unclear. Amongst various potential mechanisms, algal exudates can mediate increases in microbial activity, leading to localized hypoxic conditions which may cause coral mortality in the direct vicinity. Most of the processes likely causing such algal exudate induced coral mortality have been quantified (e.g., labile organic matter release, increased microbial metabolism, decreased dissolved oxygen availability), yet little is known about how reduced dissolved oxygen concentrations affect competitive dynamics between seaweeds and corals. The goals of this study were to investigate the effects of different levels of oxygen including hypoxic conditions on a common hermatypic coral Acropora yongei and the common green alga Bryopsis pennata. Specifically, we examined how photosynthetic oxygen production, dark and daylight adapted quantum yield, intensity and anatomical distribution of the coral innate fluorescence, and visual estimates of health varied with differing background oxygen conditions. Our results showed that the algae were significantly more tolerant to extremely low oxygen concentrations (2–4 mg L−1) than corals. Furthermore corals could tolerate reduced oxygen concentrations, but only until a given threshold determined by a combination of exposure time and concentration. Exceeding this threshold led to rapid loss of coral tissue and mortality. This study concludes that hypoxia may indeed play a significant role, or in some cases may even be the main cause, for coral tissue loss during coral-algae interaction processes.