A robust tree-ring-width chronology was developed from two Pinus tabulaeformis sampling sites in the source of the Fenhe River, Shanxi Province, China. Based on the tree-ring-width indices, a 157-year long Palmer Drought Severity Index (PDSI) was reconstructed, which explains 53.7% of the variance of the modeled PDSI over the common period 1957-2008. The drought periods in the study area include 1914-1931 and 1970 to the present, whereas the wet periods were 1866-1892 and 1932-1969. The drought of 1914-1931 was a severe long-lasting drought with a low inter-annual variability, and the drought of 1970-2009 was an overall long-term drought with a high inter-annual variability. The period of 1866-1892 is a continuously wet period with a low inter-annual variability and the period of 1932-1969 is an overall long-term wet period with a high inter-annual variability. The reconstructed PDSI series in the source of the Fenhe River shows synchronous variations with the regional drought/wetness indices. Spatial correlation analyses indicate that the higher correlations lie exclusively in the Fenhe River Basin. This indicates that the reconstructed PDSI has regional representativeness and can represent the drought history of the entire Fenhe River Basin to some extent. Furthermore, the reconstructed PDSI matches with the variability of the per unit yield of summer grain crops in Shanxi Province very well and they have significant correlation. From a long-term perspective the reconstructed PDSI series could supply scientific and valuable information to the water resources management and then help the sustainable development in agricultural production, economic development, and ecosystem balance.