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Tropical montane cloud forests (TMCFs) are expected to experience more frequent and prolonged droughts over the coming century, yet understanding of TCMF tree responses to moisture stress remains weak compared with the lowland tropics. We simulated a severe drought in a throughfall reduction experiment (TFR) for 2 years in a Peruvian TCMF and evaluated the physiological responses of several dominant species (Clusia flaviflora Engl., Weinmannia bangii (Rusby) Engl., Weinmannia crassifolia Ruiz & Pav. and Prunus integrifolia (C. Presl) Walp). Measurements were taken of (i) sap flow; (ii) diurnal cycles of stem shrinkage, stem moisture variation and water-use; and (iii) intrinsic water-use efficiency (iWUE) estimated from foliar δ13C. In W. bangii, we used dendrometers and volumetric water content (VWC) sensors to quantify daily cycles of stem water storage. In 2 years of sap flow (Js) data, we found a threshold response of water use to vapor pressure deficit vapor pressure deficit (VPD) > 1.07 kPa independent of treatment, though control trees used more soil water than the treatment trees. The daily decline in water use in the TFR trees was associated with a strong reduction in both morning and afternoon Js rates at a given VPD. Soil moisture also affected the hysteresis strength between Js and VPD. Reduced hysteresis under moisture stress implies that TMCFs are strongly dependent on shallow soil water. Additionally, we suggest that hysteresis can serve as a sensitive indicator of environmental constraints on plant function. Finally, 6 months into the experiment, the TFR treatment significantly increased iWUE in all study species. Our results highlight the conservative behavior of TMCF tree water use under severe soil drought and elucidate physiological thresholds related to VPD and its interaction with soil moisture. The observed strongly isohydric response likely incurs a cost to the carbon balance of the tree and reduces overall ecosystem carbon uptake.