Climate warming and human disturbance in north-western Canada have been accompanied by degradation of permafrost, which introduces considerable uncertainty to the future availability of northern freshwater resources. This study demonstrates the rate and spatial pattern of permafrost loss in a region that typifies the southern boundary of permafrost. Remote-sensing analysis of a 1·0 km2 area indicates that permafrost occupied 0·70 km2 in 1947 and decreased with time to 0·43 km2 by 2008. Ground-based measurements demonstrate the importance of horizontal heat flows in thawing discontinuous permafrost, and show that such thaw produces dramatic land-cover changes that can alter basin runoff production in this region. A major challenge to northern water resources management in the twenty-first century therefore lies in predicting stream flows dynamically in the context of widely occurring permafrost thaw. The need for appropriate water resource planning, mitigation, and adaptation strategies is explained.