Transcription factors with an APETELA2 (AP2) domain have been implicated in various cellular processes involved in plant development and stress responses. Of the 139 AP2 genes predicted in rice (Oryza sativa), we identified 42 genes in our current study that are induced by one or more stress conditions, including drought, high salinity, low temperature, and abscisic acid. Phylogenic analysis of these 42 stress-inducible AP2 genes revealed the presence of six subgroups (I-VI) with distinct signature motifs. Two genes, AP37 and AP59, representing subgroups I and II, respectively, were functionally characterized. Both genes were found to be induced upon 2 h of exposure to drought and high-salinity conditions but to differ in their expression profile upon exposure to low temperature and abscisic acid. The overexpression of AP37 and AP59 in rice under the control of the constitutive promoter OsCc1 increased the tolerance to drought and high salinity at the vegetative stage. Increased tolerance to low temperatures was observed only in OsCc1:AP37 plants. More importantly, the OsCc1:AP37 plants showed significantly enhanced drought tolerance in the field, which increased grain yield by 16% to 57% over controls under severe drought conditions, yet exhibited no significant difference under normal growth conditions. In contrast, grain yield in OsCc1:AP59 plants in the field was reduced by 23% to 43% compared with controls under both normal and drought stress conditions. Microarray experiments identified 10 and 38 genes that are up-regulated by AP37 and AP59, respectively, in addition to 37 genes that are commonly induced by both factors. Our results suggest that the AP37 gene has the potential to improve drought tolerance in rice without causing undesirable growth phenotypes.