Dense water formation processes in the Aegean Sea (eastern Mediterranean) are studied using a three-dimensional numerical ocean model. The simulations cover the period 1979--1994 during which major changes that affected the thermohaline circulation of the whole Mediterranean Sea were recorded. Sensitivity studies that focus on the role of freshwater budget are presented, and the results are evaluated against available hydrological data of the same period. The very cold winters of 1987, 1992, and 1993 and the extended dry period 1989--1993 that affected the whole eastern Mediterranean Sea are the main driving mechanisms, corresponding to 50% and 32%, respectively, of the excessive deepwater volume formed in the Aegean after 1987. The reduced Black Sea Water outflow during the same dry period was another important forcing mechanism, contributing 18% to the total formation, while the increased inflow of saline waters from the Levantine Sea after 1992 was an additional preconditioning factor. The locations and mechanisms of water formation processes are identified with combined analysis of data from the March 1987 oceanographic cruise in the Aegean Sea and the respective model results for that period. Deep water is found to be formed mainly through open ocean convection in the central and north Aegean Sea, while the contribution of shelf areas is limited. Intermediate water is also formed through open ocean convection in the southern Aegean Sea during cold winters as well as in the central and northern Aegean during mild winters. The total volume of dense water formed during 1979--1994 corresponds to an annual formation rate of 0.24 Sv for deep water and 0.34 Sv for intermediate water.