Frequent flash droughts can rapidly lead to water shortage, which affects the stability of ecosystems. This study determines the water-use characteristics and physiological mechanisms underlying Moso bamboo response to flash-drought events, and estimates changes to water budgets caused by extreme drought. We analyzed the variability in forest canopy transpiration versus precipitation from 2011–2013. Evapotranspiration reached 730 mm during flash drought years. When the vapor pressure deficit > 2 kPa and evapotranspiration > 4.27 mm·day−1, evapotranspiration was mainly controlled through stomatal opening and closing to reduce water loss. However, water exchange mainly occurred in the upper 0–50 cm of the soil. When soil volumetric water content of 50 cm was lower than 0.17 m3·m−3, physiological dehydration occurred in Moso bamboo to reduce transpiration by defoliation, which leads to water-use efficiency decrease. When mean stand density was <3500 trees·ha−1, the bamboo forest can safely survive the flash drought. Therefore, we recommend thinning Moso bamboo as a management strategy to reduce transpiration in response to future extreme drought events. Additionally, the response function of soil volumetric water content should be used to better simulate evapotranspiration, especially when soil water is limited.