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Drought, one of the most destructive natural disasters is projected by numerous studies to become more severe and widespread under climate change. These water limitations will have profound effects on terrestrial systems across the globe. Yet, most of the existing drought monitoring indices are based on drought stress derived from environmental conditions rather than ecosystem responses. Here, we propose using a new approach, the Normalized Ecosystem Drought Index (NEDI), coupled with modified Variable Interval Time Averaging (VITA) method, to quantify drought severity according to ecosystem transitional patterns with water availability. The method is inspired by Sprengel’s and Liebig’s Law of the Minimum for plant nutrition. Eddy covariance measurements from 60 AmeriFlux sites that cross 8 International Geosphere–Biosphere Programme (IGBP) vegetation types were used to validate the use of NEDI coupled to VITA. The results show that NEDI can reasonably depict both drought stress posed by the environment and drought responses presented by various ecosystems. Water availability becomes a dominant limiting factor for ecosystem evapotranspiration when NEDI falls below zero, and normalized evapotranspiration strength generally decreases with decreasing NEDI under this regime. The widely used self-calibrating Palmer Drought Severity Index (sc-PDSI) and Standardized Precipitation Index (SPI) have difficulty capturing ecosystem responses to water availability, although they can reasonably represent drought conditions detected in the environment. The normalization feature employed in NEDI makes it feasible to compare drought severity over different regions, seasons and vegetation types. The new drought index also provides a valuable tool for irrigation and water distribution management practices which may enhance water conservation efforts as drought conditions become more prevalent.