Dioctahedral clays from an active continental geothermal system have been studied to assess their usefulness as proxies of paleo-hydrological and thermal conditions in the subsurface. Drill cuttings from Well WK244 in the Te Mihi area of the Wairakei Geothermal Field, New Zealand, were analyzed to determine the mineralogical, morphological, and isotopic characteristics of hydrothermal clays in these samples. Mixed-layer illite-dioctahedral smectite (I-S) and R0 chlorite-trioctahedral smectite are the main clay minerals, with I-S clays varying downward from R1 to R3 ordering and 50 to >90% illite over 160 m. The proportion of illite in I-S correlates positively with downhole temperature (r = 0.98) and I-S morphology changes from high aspect ratio ribbons, laths, and hairy fibers to pseudo-hexagonal plates with depth. Swelling clay percentages determined using the methylene blue method show a strong positive correlation with %S in I-S (r = 0.91), validating use of methylene blue as a rapid field tool for characterizing the smectite to illite transition in this active geothermal environment. The oxygen isotopic composition of I-S (δ18OI-S) decreases systematically with depth, and mostly reflects a progressive increase in subsurface temperature during clay formation. Estimates of water/rock ratios calculated using δ18OI-S values display stratigraphic variability that corresponds to variations in permeability. Oxygen isotopic measurements of I-S are a useful tool for understanding reservoir and permeability evolution in such geothermal systems and their related fossil analogs.