The drought of 2003 was exceptionally severe in many regions of Europe, both in duration and in intensity. In some areas, especially in Germany and France, it was the strongest drought for the last 50 years, lasting for more than 6 months. We used continuous carbon and water flux measurements at 12 European monitoring sites covering various forest ecosystem types and a large climatic range in order to characterise the consequences of this drought on ecosystems functioning. As soil water content in the root zone was only monitored in a few sites, a daily water balance model was implemented at each stand to estimate the water balance terms: trees and understorey transpiration, rainfall interception, throughfall, drainage in the different soil layers and soil water content. This model calculated the onset date, duration and intensity of the soil water shortage (called water stress) using measured climate and site properties: leaf area index and phenology that both determine tree transpiration and rainfall interception, soil characteristics and root distribution, both influencing water absorption and drainage. At sites where soil water content was measured, we observed a good agreement between measured and modelled soil water content. Our analysis showed a wide spatial distribution of drought stress over Europe, with a maximum intensity within a large band extending from Portugal to NE Germany. Vapour fluxes in all the investigated sites were reduced by drought, due to stomatal closure, when the relative extractable water in soil (REW) dropped below ca. 0.4. Rainfall events during the drought, however, typically induced rapid restoration of vapour fluxes. Similar to the water vapour fluxes, the net ecosystem production decreased with increasing water stress at all the sites. Both gross primary production (GPP) and total ecosystem respiration (TER) also decreased when REW dropped below 0.4 and 0.2, for GPP and TER, respectively. A higher sensitivity to drought was found in the beech, and surprisingly, in the broadleaved Mediterranean forests; the coniferous stands (spruce and pine) appeared to be less drought-sensitive. The effect of drought on tree growth was also large at the three sites where the annual tree growth was measured. Especially in beech, this growth reduction was more pronounced in the year following the drought (2004). Such lag effects on tree growth should be considered an important feature in forest ecosystems, which may enhance vulnerability to more frequent climate extremes.