Producing high-yielding wheat under limited water resources is an urgent task for sustainable agriculture and food security. With limited water supply, wheat reshapes the developmental programs such as root architecture, tillering, spike morphology for better adaptation, which in turn affecting grain yield. How to balance stress tolerance and development remains elusive. Through GWAS analysis and transcriptome profile, we have identified TabHLH27 as a candidate gene for QTL of spikelet number per spike under limited water condition. TabHLH27 is predominantly expressed in spike and root, and responsive to drought treatment. Overexpression of TabHLH27 improved drought tolerance, grain yield and water use efficiency (WUE) in wheat, whereas, knock out of TabHLH27 attenuated drought resistance and reduced WUE. Transcriptome analysis and DNA binding motifs scanning indicated that TabHLH27 regulates drought tolerance-related genes as well as root development genes under limited water conditions. Interestingly, TabHLH27 is induced by drought at short term but suppressed at long term. This is linked to the auto-inhibition of TabHLH27 on its own transcription, which further being used as ‘break’ for preventing over-reaction to drought. SNP-1179 in the accessible chromatin region within promoter of TabHLH27 destroyed the binding site of dehydration-responsive element-binding protein 2A (DREB2A), a key regulator for drought and heat-shock stress tolerance. Population genetics reveals that TabHLH27 is significantly associated with yield, drought-tolerance, and heat-tolerance related traits, and was positively selected during the breeding history. Our study found TabHLH27 autoregulation in balancing root growth and drought tolerance for WUE improvement in wheat, which sheds a light on decoupling the trade-off between yield and stress tolerance. It will be conducive to bred high-yield and water-saving wheat varieties.