Drought monitoring is important to analyse the influence of rainfall deficiency patterns on bushfire behaviour. Remote sensing provides tools for spatially explicit monitoring of drought across large areas. The objective of this study was to assess the performance of MODIS-based reflectance spectral indices to monitor drought across forest and woodland vegetation types in the fire prone Sydney Basin Bioregion, NSW, Australia. A time series of eight spectral indices were created from 2000 to 2009 to monitor inter-annual changes in drought and were compared to the Standardized Precipitation Index (SPI), a precipitation deficit/surplus indicator. A pixel-to-weather station paired correlation approach was used to assess the relationship between SPI and the MODIS-based spectral indices at different time scales. Results show that the Normalised Difference Infrared Index-band 6 (NDIIb6) provided the most suitable indicator of drought for the high biomass vegetation types considered. The NDIIb6 had the highest sensitivity to drought intensity and was highly correlated with SPI at all time scales analysed (i.e., 1, 3 and 6-month SPI) suggesting that variations in precipitation patterns have a stronger influence on vegetation water content than vegetation greenness properties. Spatial similarities were also found between patterns of NDIIb6-based drought maps and SPI values distribution. NDIIb6 outperformed the spectral index currently in use for operational drought monitoring systems in the region (Normalised Difference Vegetation Index, NDVI) and its implementation in existing drought-monitoring systems is recommended. © 2011 Elsevier Inc.