Abscisic acid (ABA) catabolism is one of the determinants of endogenous ABA levels affecting numerous aspects of plant growth and abiotic stress responses. The major ABA catabolic pathway is triggered by ABA 8′-hydroxylation catalysed by the cytochrome P450 CYP707A family. Among four members of Arabidopsis CYP707As, the expression of CYP707A3 was most highly induced in response to both dehydration and subsequent rehydration. A T-DNA insertional cyp707a3-1 mutant contained higher ABA levels in turgid plants, which showed a reduced transpiration rate and hypersensitivity to exogenous ABA during early seedling growth. On dehydration, the cyp707a3-1 mutant accumulated a higher amount of stress-induced ABA than the wild type, an event that occurred relatively later and was coincident with slow drought induction of CYP707A3. The cyp707a3 mutant plants exhibited both exaggerated ABA-inducible gene expression and enhanced drought tolerance. Conversely, constitutive expression of CYP707A3 relieved growth retardation by ABA, increased transpiration, and a reduction of endogenous ABA in both turgid and dehydrated plants. Taken together, our results indicate that CYP707A3 plays an important role in determining threshold levels of ABA during dehydration and after rehydration.