Aquatic biodiversity faces increasing threats from climate change, escalating exploitation of water and land use intensification. Loss of vegetation in catchments (= watersheds) has been identified as a substantial problem for many river basins, and there is an urgent need to better understand how climate change may interact with changes in catchment vegetation to influence the ecological condition of freshwater ecosystems. We used 20 years of biological monitoring data from Victoria, southeastern Australia, to explore the influences of catchment vegetation and climate on stream macroinvertebrate assemblages. Southeastern Australia experienced a severe drought from 1997 to 2009, with reductions of stream flows >50% in some areas. The prolonged drying substantially altered macroinvertebrate assemblages, with reduced prevalence of many flow-dependent taxa and increased prevalence of taxa that are tolerant of low-flow conditions and poor water quality. Stream condition, as assessed by several commonly used macroinvertebrate indices, was consistently better in reaches with extensive native tree cover in upstream catchments. Prolonged drought apparently caused similar absolute declines in macroinvertebrate condition indices regardless of vegetation cover, but streams with intact catchment and riparian vegetation started in better condition and remained so throughout the drought. The largest positive effects of catchment tree cover on both water quality and macroinvertebrate assemblages occurred above a threshold of ca. 60% areal tree cover in upstream catchments and in higher rainfall areas. Riparian tree cover also had positive effects on macroinvertebrate assemblages, especially in warmer catchments. Our results suggest that the benefits of extensive tree cover via improved water quality and in-channel habitat persist during drought and show the potential for vegetation management to reduce negative impacts of climatic extremes for aquatic ecosystems.