YUCCA (YUC) proteins constitute a family of flavin monooxygenases (FMOs), with an important role in auxin (IAA) biosynthesis. Here we report that Arabidopsis plants overexpressing YUC6 display enhanced IAA-related phenotypes and exhibit improved drought stress tolerance, low rate of water loss and controlled ROS accumulation under drought and oxidative stresses. Co-overexpression of an IAA-conjugating enzyme reduces IAA levels but drought stress tolerance is unaffected, indicating that the stress-related phenotype is not based on IAA overproduction. YUC6 contains a previously unrecognized FAD- and NADPH-dependent thiol-reductase activity (TR) that overlaps with the FMO domain involved in IAA biosynthesis. Mutation of a conserved cysteine residue (Cys-85) preserves FMO but suppresses TR activity and stress tolerance, whereas mutating the FAD- and NADPH-binding sites, that are common to TR and FMO domains, abolishes all outputs. We provide a paradigm for a single protein playing a dual role, regulating plant development and conveying stress defence responses.