microRNAs are 19-22 nt small non-coding RNAs and have been implicated in abiotic stress response. In this study, we found that manipulation of microRNA166 resulted in morphological changes that confer drought resistance in rice. From a large-scale screening for miRNA knock-down lines in rice, we identified miR166 knock-down lines (STTM166) exhibiting a phenotype of leaf rolling, which is normally displayed by rice plants under drought stress. The leaf rolling in STTM166 rice plants was likely due to a reduced size of the bulliform cells and abnormality of sclerenchymatous cells in leaves. The STTM166 plants had reduced stomatal conductance and showed a decreased transpiration rate. The STTM166 lines also exhibited an altered xylem in the stem and a decreased hydraulic conductivity likely due to reduced diameter of the xylem vessels. Molecular analyses revealed OsHB4, a member of HD-Zip III gene family, as a major target of miR166 and overexpression of miR166-resistant OsHB4 resulted in rice plants resembling the STTM166 lines, including leaf rolling and higher drought resistance. The downstream genes of miR166-OsHB4 consisted of polysaccharides synthesis related genes that may contribute to cell wall formation and vascular development. Our results suggest that drought resistance in rice can be increased by manipulating miRNAs, which leads to developmental changes such as leaf rolling and reduced diameter of the xylem that mimic natural responses of plants to water deficit stress.