Sugarcane (Saccharum hybrid) is an important industrial crop worldwide. Its growth and sucrose contents are severely affected by drought stress. Genetic engineering offers a rapid solution to improve tolerance level of sugarcane against this stress. This study was designed to transform sugarcane with the Tomato ethylene responsive factor 1 (TERF1) gene through Agrobacterium. Embryogenic callus of sugarcane cv. XintaitangR22 was used for transformation with Agrobacterium strain LBA4404 harbouring the pROK2 vector containing the TERF1 gene driven by the CaMV 35S promoter. Highest regeneration efficiency (74%) was obtained with inoculum density (OD600) at 0.4 and co-cultivated for 4 days on MS-based medium 5.4% transformation efficiency was acquired from the regenerated plants. Successful insertion of the TERF1 gene into sugarcane was indicated by PCR-positive plants (n = 4). Expression of TERF1 transcripts in transgenic lines at various levels was detected by reverse transcriptase-PCR. Under normal conditions, growth status of transgenic lines was similar to that of wild-type plants by contrast, only transgenic lines were able to withstand water-deficit stress conditions, showing tolerance against drought stress. Physiological and biochemical assays revealed that TERF1-overexpressed plants showed not only increased accumulation of proline, soluble sugars and glycine betaine but also reduced malondialdehyde and H2O2 content in response to drought stress. Our results revealed that overexpression of TERF1 in sugarcane conferred drought tolerance through increased accumulation of osmo-protectant, decreasing reactive oxygen species and malondialdehyde content, which possibly resulted from activation of expression of stress-related genes by TERF1 under stress. These findings indicate that the gene might have a regulatory role in the response to drought stress in sugarcane.