Urban residents will have water supplies cut by 15 percent while agricultural users will face cuts of around 25 percent, Environment Minister Duarte Cordeiro said after a drought management committee meeting.
If no measures are taken "we would finish the year without enough water for public supply", he said.
More than 19 percent of the Algarve was suffering drought conditions at the end of November, according to the country's ocean and atmospheric institute IPMA, with drought spreading further in December.
"Algarve is seeing its worst drought this year," Jose Carlos Pimenta Machado, vice president of the APA environmental agency, said last week.
"We've never seen a situation like this, with water levels at their lowest in both reservoirs and in groundwater," he said, calling it "the consequence of 10 consecutive years of drought".
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