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This article describes a modification of the Palmer Drought Severity Index (PDSI) as adapted to Mediterranean conditions, resulting in a new index, the MedPDSI. It differs from the original PDSI because the olives crop, a typical Mediterranean perennial resistant to water stress, is assumed as drought reference crop aiming at the application of the soil water balance. The adopted approach modifies the soil water balance computation, with the actual evapotranspiration computed with the FAO-PM reference ET_o and a crop coefficient obtained from the FAO dual K_c approach, K_c = K_cb+K_e. The basal crop coefficient K_cb refers to transpiration and is parameterized at the month scale for a typical rainfed olives grove. The soil evaporation coefficient K_e is estimated every month as a function of soil evaporation, thus depending on monthly precipitation, evaporative atmospheric demand and the soil evaporation characteristics following FAO56. The basic computations of PDSI are kept and self-calibration is adopted. MedPDSI was tested for various soil types and locations across Portugal. Comparing results of the water balance with MedPDSI and PDSI, it is apparent a larger actual ET during the rainy months and smaller in the dry months with MedPDSI; coherently, runoff and percolation decrease. It results, however, relatively similar identification of drought and wetness periods, with the MedPDSI responding quicker to changes in precipitation.