Water scarcity and the rising cost of chemical fertilizers pose major challenges to sustainable crop production in Egypt, particularly in sandy soils with low fertility. This study was conducted during the winters of 2022–2023 and 2023–2024 to investigate the combined effects of different irrigation levels and Nostoc algae extract on soil properties and wheat (Triticum aestivum) productivity. Three irrigation levels (100%, 80%, and 60% of crop evapotranspiration [ETc]) were evaluated with and without added algae. To analyze our data, we performed an analysis of variance (ANOVA) to evaluate differences among the treatments; correlation analysis was conducted to assess the relationships among soil properties and plant properties. The results showed that application of algae significantly increased soil organic matter under all irrigation treatments. In contrast, soil pH decreased in response to addition of algae, with the greatest reduction observed under the 60% ETc treatment (0.29 and 0.31 units in the first and second growing seasons, respectively). Water productivity differed significantly among treatments, following the order: 80% ETc > 100% ETc > 60% ETc (p ≤ 0.05). The application of algae under the 80% ETc regime increased water productivity by 12.01% and 12.19% in the first and second seasons, respectively, compared with the treatment without algae. Moreover, organic matter exhibited a strong positive correlation with N, P, and K contents in both straw and grain. The total yield reached its greatest level at 100% ETc with algae (5,526.43 ± 61.30 kg feddan⁻¹), whereas the lowest value was reported at 60% ETc without algae (2,880.97 ± 37.81 kg feddan⁻¹). Overall, application of algae contributed to improved soil properties, enhanced soil nutrients, structure and moisture retention, and mitigated yield losses associated with reduced irrigation. These findings suggest that integrating algae biofertilizers with deficit irrigation strategies can serve as a sustainable approach to improve wheat production in sandy soils under water-limited conditions.