Plant growth and productivity are adversely affected by various abiotic stress factors. In our previous study, we used Prosopis juliflora, a drought-tolerant tree species of Fabaceae, as a model plant system for mining genes functioning in abiotic stress tolerance. Large-scale random EST sequencing from a cDNA library obtained from drought-stressed leaves of 2-month-old P. juliflora plants resulted in identification of three different auxin-inducible glutathione S-transferases. In this paper, we report the cellular localization and the ability to confer drought tolerance in transgenic tobacco of one of these GSTs (PjGSTU1). PjGSTU1 was overexpressed in Escherichia coli and GST and GPX activities in total protein samples were assayed and compared with controls. The results indicated that PjGSTU1 protein forms a functional homo-dimer in recombinant bacteria with glutathione transferase as well as glutathione peroxidase activities. PjGSTU1 transgenic tobacco lines survived better under conditions of 15% PEG stress compared with control un-transformed plants. In vivo localization studies for PjGSTU1 using GFP fusion revealed protein localization in chloroplasts of transgenic plants. The peroxidase activity of PjGSTU1 and its localization in the chloroplast indicates a possible role for PjGSTU1 in ROS removal.