The ZFHD recognition sequence (ZFHDRS) and NAC recognition sequence (NACRS) play an important role in the dehydration-inducible expression of the Arabidopsisthaliana EARLY RESPONSIVETO DEHYDRATION STRESS 1 (ERD1) gene. Using the yeast one-hybrid system, we isolated a cDNA encoding the ZFHD1 transcriptional activator that specifically binds to the 62 bp promoter region of ERD1, which contains the ZFHDRS. Both in vitro and in vivo analyses confirmed specific binding of the ZFHD1 to ZFHDRS, and the expression of ZFHD1 was induced by drought, high salinity and abscisic acid. The DNA-binding and activation domains of ZFHD1 were localized on the C-terminal homeodomain and N-terminal zinc finger domain, respectively. Microarray analysis of transgenic plants over-expressing ZFHD1 revealed that several stress-inducible genes were upregulated in the transgenic plants. Transgenic plants exhibited a smaller morphological phenotype and had a significant improvement of drought stress tolerance. Using the yeast two-hybrid system, we detected an interaction between ZFHD1 and NACRS-binding NAC proteins. Moreover, co-over-expression of the ZFHD1 and NAC genes restored the morphological phenotype of the transgenic plants to a near wild-type state and enhanced expression of ERD1 in both Arabidopsis T87 protoplasts and transgenic Arabidopsis plants.