Drought is a major limiting factor for crop production. To identify critical genes for drought resistance in rice (Oryza sativa), we screened T-DNA mutants and identified a drought-hypersensitive mutant, dsm2. The mutant phenotype was caused by a T-DNA insertion in a gene encoding a putative β-carotene hydroxylase (BCH). BCH is predicted for the biosynthesis of zeaxanthin, a carotenoid precursor of abscisic acid (ABA). The amounts of zeaxanthin and ABA were significantly reduced in two allelic dsm2 mutants after drought stress compared with the wild type. Under drought stress conditions, the mutant leaves lost water faster than the wild type and the photosynthesis rate, biomass, and grain yield were significantly reduced, whereas malondialdehyde level and stomata aperture were increased in the mutant. The mutant is also hypersensitive to oxidative stresses. The mutant had significantly lower maximal efficiency of photosystem II photochemistry and nonphotochemical quenching capacity than the wild type, indicating photoinhibition in photosystem II and decreased capacity for eliminating excess energy by thermal dissipation. Overexpression of DSM2 in rice resulted in significantly increased resistance to drought and oxidative stresses and increases of the xanthophylls and nonphotochemical quenching. Some stress-related ABA-responsive genes were up-regulated in the overexpression line. DSM2 is a chloroplast protein, and the response of DSM2 to environmental stimuli is distinctive from the other two BCH members in rice. We conclude that the DSM2 gene significantly contributes to control of the xanthophyll cycle and ABA synthesis, both of which play critical roles in the establishment of drought resistance in rice.