Severe droughts have caused widespread tree mortality across many forest biomes with profound effects on the function of ecosystems and carbon balance. Climate change is expected to intensify regional-scale droughts, focusing attention on the physiological basis of drought-induced tree mortality. Recent work has shown that catastrophic failure of the plant hydraulic system is a principal mechanism involved in extensive crown death and tree mortality during drought, but the multi-dimensional response of trees to desiccation is complex. Here we focus on the current understanding of tree hydraulic performance under drought, the identification of physiological thresholds that precipitate mortality and the mechanisms of recovery after drought. Building on this, we discuss the potential application of hydraulic thresholds to process-based models that predict mortality.