Patients with advanced cirrhosis and portal hypertension often show an abnormal regulation of extracellular fluid volume, resulting in the accumulation of fluid as ascites, pleural effusion or oedema. The mechanisms responsible for ascites formation include alterations in the splanchnic circulation as well as renal functional abnormalities that favour sodium and water retention. Renal abnormalities occur in the setting of a hyperdynamic state characterized by an increase cardiac output, a reduction in total vascular resistance and an activation of neurohormonal vasoactive systems. This circulatory dysfunction, due mainly to intense arterial vasodilation in the splanchnic circulation, is considered to be a primary feature in the pathogenesis of ascites. A major factor involved in the development of splanchnic arterial vasodilation is nitric oxide (NO), a potent vasodilator that is elevated in the splanchnic circulation of patients with cirrhosis. This event decreases effective arterial blood volume and leads to fluid accumulation and renal function abnormalities which are a consequence of the homeostatic activation of vasoconstrictor and antinatriuretic factors triggered to compensate for a relative arterial underfilling. The net effect is avid retention of sodium and water as well as renal vasoconstriction. The mechanisms of sodium and water retention and ascites formation in patients with cirrhosis are discussed in this review.