The Murray-Darling Basin in southeast Australia is experiencing one of the most severe droughts observed recently in the world, driven by several years of rainfall deficits and record high temperatures. This paper provides new basin-scale observations of the multiyear drought, integrated to a degree rarely achieved on such a large scale, to assess the response of water resources and the severity of the drought. A combination of Gravity Recovery and Climate Experiment (GRACE) data with in situ and modeled hydrological data shows the propagation of the water deficit through the hydrological cycle and the rise of different types of drought. Our observations show the rapid drying of soil moisture and surface water storages, which reached near-stationary low levels only ∼2 years after the onset of the drought in 2001, with a loss of ∼80 and ∼12 km3 between January 2001 and January 2003, respectively. The multiyear drought has led to the almost complete drying of surface water resources which account for most of the water used for irrigation and domestic purposes. High correlation between observed groundwater variations and GRACE data substantiates the persistent reduction in groundwater storage, with groundwater levels still declining 6 years after the onset of the drought (groundwater loss of ∼104 km3 between 2001 and 2007). The hydrological drought continues even though the region returned to average annual rainfall during 2007.