It has been suggested, on the basis of modern hydrology and fully coupled palaeoclimate simulations, that the warm greenhouse conditions that characterized the early Palaeogene period (55-45Myr ago) probably induced an intensified hydrological cycle with precipitation exceeding evaporation at high latitudes. Little field evidence, however, has been available to constrain oceanic conditions in the Arctic during this period. Here we analyse Palaeogene sediments obtained during the Arctic Coring Expedition, showing that large quantities of the free-floating fern Azolla grew and reproduced in the Arctic Ocean by the onset of the middle Eocene epoch (~50Myr ago). The Azolla and accompanying abundant freshwater organic and siliceous microfossils indicate an episodic freshening of Arctic surface waters during an ~800,000-year interval. The abundant remains of Azolla that characterize basal middle Eocene marine deposits of all Nordic seas probably represent transported assemblages resulting from freshwater spills from the Arctic Ocean that reached as far south as the North Sea. The termination of the Azolla phase in the Arctic coincides with a local sea surface temperature rise from ~10°C to 13°C, pointing to simultaneous increases in salt and heat supply owing to the influx of waters from adjacent oceans. We suggest that onset and termination of the Azolla phase depended on the degree of oceanic exchange between Arctic Ocean and adjacent seas.