Water scarcity prevailing in the drylands is threatening the sustainability of livestock production systems. The water footprint (WF) indicator was proposed as a metric of water use. This study aimed to determine the WF and the economic water productivity (EWP) of 1 kg of fat and protein-corrected milk (FPCM) in eight dairy farms (n = 8; animals = 117 ± 62; area = 198 ± 127; 95% confidence level) in northern Tunisia. Then, to assess the effects of three simulation scenarios targeting the reduction of the WF of milk production (scenario A: using triticale silage to replace, on DM basis, the silage of maize, sorghum or ray-grass; scenario B: reducing by 56% the wastage of water devoted to milking, cooling, cleaning and servicing; scenario C: using concentrate feeds imported from Brazil and Argentina instead of that imported from France). A year-round monitoring of on-farm practices was performed using water-meters and recording equipment installed in key locations in the target dairy farms: (i) water used for feed production, (ii) cow watering, (iii) servicing water, (v) crop and forage production and (iv) economic and production performance were controlled by water source (green and blue). Over the eight farms evaluated, milk production consumed on average 1.36 ± 0.41 m3/kg FPCM, of which 0.93 ± 0.40 m3/kg FPCM was green water and 0.42 ± 0.30 m3/kg FPCM was blue water. However, virtual water of 1 kg FPCM averaged 43% ± 14.3%. Water used for feed production for lactating cows represents approximately 87% ± 6% of the total WF of milk production. However, drinking and servicing water contributed by 3.75% ± 2% and 9% ± 5% to the total WF of milk, respectively. The EWP assessment revealed that the selected dairy farms had a relatively small gross margin per m3 of water averaging US$ 0.05 ± 0.04. The variation in WF of milk was mainly associated with diets’ ingredients, which affected milk productivity and water consumption. Scenario analysis indicated that using feed with less water requirements or importing feeds from countries where its water consumption is low could reduce consumptive water use for milk production by up to 16%. The efficient use of servicing water could reduce blue WF of milk by up to 4%. The implementation of these measures would lead to potential total water savings in the Tunisian dairy sector of 646 million m3 per year (30%).