Ensuring global food and water security requires a detailed understanding of how coupled socio-environmental systems respond to drought. Using the Platte River Watershed in Nebraska (USA) as an exemplar mixed urban-agricultural watershed, we quantify biophysical response to drought in urban (Lincoln NE) and agricultural systems alongside a qualitative analysis of governance response and adaptive capacity of both sectors. Synthesis of results highlights parallels and discontinuities between urban and agricultural preparations for and response to drought. Whereas drought prompted an increase in well installations and expansion of water-intensive crops, e.g., corn, in the agricultural sector, outdoor water use restrictions rapidly curtailed water withdrawals in the urban sector, where water conservation has gradually decoupled total withdrawals from population growth. Water governance institutions at the municipal, district, and statewide levels showed evidence of learning and adaptive management, facilitated by a shared regional identity around agriculture. We conclude that, rather than exacerbating intersectoral conflict, cities may introduce a high-value and flexible water use that can be rapidly curtailed during drought. The ability to rapidly reduce urban water use and thereby avoid limiting agricultural irrigation during drought enables cities to provide adaptive capacity in mixed urban-agricultural watersheds, particularly where crops are highly reliant on irrigation.