Schwarzenegger warned that residents and water managers must immediately cut their water use or face the possibility of rationing next year if there is another dry winter.
"We must recognize the severity of the crisis that we face," the Republican governor said Wednesday at a news conference.
He signed an executive order directing the state's response to unusually dry conditions that are damaging crops, harming water quality and causing extreme fire danger across California. Many communities already require water conservation or rationing.
The statewide drought declaration is the first since 1991, when Gov. Pete Wilson acted in the fifth year of a drought that lasted into 1992.
Schwarzenegger directed the state Department of Water Resources to help speed water transfers to areas with the worst shortages, to help local water districts with conservation efforts and to assist farmers suffering losses from the drought.
Los Angeles residents won't be able to wash their cars at home or water their lawns during the day, reports CBS News correspondent Sandra Hughes.
California depends on winter snow accumulating in the Sierra Nevada for much of its summer water supply. But March, April and May were the driest winter months on record, forcing water use cutbacks by farmers and urban residents alike.
Avocado farmer Charlie Wolk told Hughes that he's been forced to prune 30 percent of his trees into hibernation to meet a cutback in water supplies.
"I suppose eventually I'll get to the point where there won't be anything to cut," said Wolk.
The Western Regional Climate Center in Reno, Nev., reported that precipitation in California during that period was 1.2 inches, or 22 percent of the average for the 114 years since record-keeping began.
Snow measurements last month found that the Sierra held just 69 percent of an average winter. Runoff into California rivers was at 55 percent of a normal year. The state's major reservoirs are at 50 percent to 63 percent of their capacity at a time when they ideally would be full.
Conditions could be even worse next year if there is another dry winter, Water Resources Director Lester Snow said.
"We need at least above normal in terms of our snowpack, and then we're still going to be tight," Snow said. "The idea is to put programs in place now to soften the impact in 2008 and to prepare for a potential third year of drought in 2009."
California's population has mushroomed since the last drought, while the water supply has dwindled, he said.
An eight-year drought in the Southwest means California can't depend on Colorado River water to help supply Southern California. And a federal judge's order last year requires that more Northern California water be left in the Sacramento-San Joaquin Delta to aid declining fish populations.
"We're suffering the perfect storm, if you will," said Timothy Quinn, executive director of the Association of California Water Agencies. "The purpose of the governor's declaration is to send a wake-up call."
California has never resorted to statewide rationing during droughts, Quinn said.
Worst-hit so far is the San Joaquin Valley, which could soon merit an emergency declaration because of crop damage, Snow said.
The U.S. Bureau of Reclamation said this week it would cut water supplied to Central Valley farms to 40 percent of the amount growers contract for with the federal government. Water deliveries from state reservoirs could drop to 35 percent, Snow said.
That could mean hundreds of acres of crops won't be planted this year, according to the giant Westlands Water District, which supplies growers who produce about $1 billion worth of crops annually.
The state is exploring ways to send scarce water to farmers for the growing season now while cutting deliveries later, Snow said.
"Giving water to the farmers in September doesn't help the fact that they need it on their tomato crop in June," Snow said. "It's not just the tomato crop that you lose. It's the employment that's associated with the tomato crop."
Schwarzenegger used the drought declaration to push a nearly $12 billion bond to fund delta, river and groundwater improvements, conservation and recycling efforts, and reservoirs. Legislators have not agreed to his plan.
"It is easy for Sacramento to put off dealing with the water infrastructure," Schwarzenegger said. "But as we now see, there is no more time to waste, because nothing is more vital than to protect our economy, to protect our environment, and to protect of quality of life."