Severe droughts in the Northern Hemisphere cause widespread decline of agricultural yield, reduction of forest carbon uptake, and increased CO2 growth rates in the atmosphere. Plants respond to droughts by partially closing their stomata to limit their evaporative water loss, at the expense of carbon uptake by photosynthesis. This trade-off maximizes their water-use efficiency, as measured for many individual plants under laboratory conditions and field experiments. Here we analyze the 13C/12C stable isotope ratio in atmospheric CO2 (reported as δ13C) to provide new observational evidence of the impact of droughts on the water-use efficiency across areas of millions of km2 and spanning one decade of recent climate variability. We find strong and spatially coherent increases in water-use efficiency along with widespread reductions of net carbon uptake over the Northern Hemisphere during severe droughts that affected Europe, Russia, and the United States in 2001-2011. The impact of those droughts on water-use efficiency and carbon uptake by vegetation is substantially larger than simulated by the land-surface schemes of six state-of-the-art climate models. This suggests that drought induced carbon-climate feedbacks may be too small in these models and improvements to their vegetation dynamics using stable isotope observations can help to improve their drought response.