Plant adaptive responses to abiotic stress are coordinated by restriction of plant growth and development. The plant hormone abscisic acid (ABA) is the key regulator of the response to abiotic stress, and its sensitivity determines abiotic stress tolerance levels. We previously showed that the E3 ubiquitin ligase CaAIRF1 functions as a positive regulator of ABA and drought stress via modulation of transcription and stability of the type 2C protein phosphatase CaADIP1. Here, we report the identification and functional analysis of a novel-type 2C phosphatase, CaAIPP1 (Capsicum annuum CaAIRF1 Interacting Protein Phosphatase 1). CaAIPP1 interacted with and was ubiquitinated by CaAIRF1. CaAIPP1 gene expression in pepper leaves was induced by ABA and drought. CaAIPP1 degradation was faster in crude protein extracts from ABA-treated pepper plants than in those from control plants. CaAIPP1-overexpressing plants displayed an ABA-hyposensitive phenotype during seed germination and seedling growth. Moreover, these plants exhibited a drought-sensitive phenotype characterized by high levels of transpirational water loss via decreased stomatal closure and reduced leaf temperatures. Our data indicate that CaAIPP1 is a negative regulator of the drought stress response via ABA-mediated signalling. Our findings provide a valuable insight into the plant defence mechanism that operates during drought stress.