Summary Eastern Australia was subject to its hottest and driest year on record in 2019. This extreme drought resulted in massive canopy die‐back in eucalypt forests. The role of hydraulic failure and tree size on canopy die‐back in three eucalypt tree species during this drought was examined. We measured pre‐dawn and midday leaf water potential (Ψ_leaf), per cent loss of stem hydraulic conductivity and quantified hydraulic vulnerability to drought‐induced xylem embolism. Tree size and tree health was also surveyed. Trees with most, or all, of their foliage dead exhibited high rates of native embolism (78–100%). This is in contrast to trees with partial canopy die‐back (30–70% canopy die‐back: 72–78% native embolism), or relatively healthy trees (little evidence of canopy die‐back: 25–31% native embolism). Midday Ψ_leaf was significantly more negative in trees exhibiting partial canopy die‐back (−2.7 to −6.3 MPa), compared with relatively healthy trees (−2.1 to −4.5 MPa). In two of the species the majority of individuals showing complete canopy die‐back were in the small size classes. Our results indicate that hydraulic failure is strongly associated with canopy die‐back during drought in eucalypt forests. Our study provides valuable field data to help constrain models predicting mortality risk.