Pakistan’s agriculture and food production account for 27% of its overall gross domestic product (GDP). Despite ongoing advances in technology and crop varieties, an imbalance between water availability and demand, combined with robust shifts in drought propagation has negatively affected the agro-ecosystem and environmental conditions. In this study, we examined hydro-meteorological drought propagation and its associated impacts on crop yield across natural and human-disturbed agro-ecological zones (AEZs) in Pakistan. Multisource datasets (i.e., ground observations, reanalysis, and satellites) were used to characterize the most extensive, intense drought episodes from 1981 to 2018 based on the standardized precipitation evaporation index (SPEI), standardized streamflow index (SSFI), standardized surface water storage index (SSWSI), and standardized groundwater storage index (SGWI). The most common and intense drought episodes characterized by SPEI, SSFI, SSWSI, and SGWI were observed in years 1981–1983, 2000–2003, 2005, and 2018. SPEI yielded the maximum number of drought months (90) followed by SSFI (85), SSWSI (75), and SGWI (35). Droughts were frequently longer and had a slower termination rate in the human-disturbed AEZs (e.g., North Irrigated Plain and South Irrigated Plain) compared to natural zones (e.g., Wet Mountains and Northern Dry Mountains). The historical droughts are likely caused by the anomalous large-scale patterns of geopotential height, near-surface air temperature, total precipitation, and prevailing soil moisture conditions. The negative values (<−2) of standardized drought severity index (DSI) observed during the drought episodes (1988, 2000, and 2002) indicated a decline in vegetation growth and yield of major crops such as sugarcane, maize, wheat, cotton, and rice. A large number of low-yield years (SYRI ≤ −1.5) were recorded for sugarcane and maize (10 years), followed by rice (9 years), wheat (8 years), and cotton (6 years). Maximum crop yield reductions relative to the historic mean (1981–2017) were recorded in 1983 (38% for cotton), 1985 (51% for maize), 1999 (15% for wheat), 2000 (29% for cotton), 2001 (37% for rice), 2002 (21% for rice), and 2004 (32% for maize). The percentage yield losses associated with shifts in SSFI and SSWSI were greater than those in SPEI, likely due to longer drought termination duration and a slower termination rate in the human-disturbed AEZs. The study’s findings will assist policymakers to adopt sustainable agricultural and water management practices, and make climate change adaptation plans to mitigate drought impacts in the study region.