Healthy watersheds provide valuable services to society, including the supply and purification of fresh water. Because these natural ecosystem services lie outside the traditional domain of commercial markets, they are undervalued and underprotected. With population and development pressures leading to the rapid modification of watershed lands, valuable hydrological services are being lost, which poses risks to the quality and cost of drinking water and the reliability of water supplies. Increasing the scale and scope of programmes to protect hydrological services requires policies that harmonize land uses in watersheds with the provision of these important natural services. This article summarizes key attributes of hydrological services and their economic benefits; presents a spectrum of institutional mechanisms for safeguarding those services; discusses programmes in Quito (Ecuador), Costa Rica and New York City; and offers some lessons learned and recommendations for achieving higher levels of watershed protection.