This paper describes the water crisis faced by the city of Guadalajara with the drying up of its main source of water, Lake Chapala. This drying up of Mexico’s largest lake will cause far-reaching economic and ecological consequences for the extended region. The paper also examines the underlying causes, which are centred on the inadequate and unsustainable management of the LermaChapala river basin (that extends over five states). It looks at the innovative, although as yet insufficient, institutional response towards integrated sustainable water management in Mexico, which centres on a shift from centralized water management at the federal level to a multi-stakeholder and participative system based in river basins, and reflects on the current challenges posed.