Catalpa bungei C.A.Mey. is a common ornamental timber species. Its survival and growth are greatly affected by water scarcity in arid and semi-arid areas of Northwest China. Evidence suggests arbuscular mycorrhizal fungus (AMF) may improve plant drought resistance. However, there is limited information on the systematic effects of AMF on drought resistance in C. bungei seedlings. Here, a pot experiment was used to explore the effects of inoculation with the AMF Rhizophagus intraradices on the growth and physiological performance of C. bungei under different water treatment conditions. Three water levels and two mycorrhizal inoculation treatments were used with factorial design. The results showed that drought stress noticeably affected the growth and physiological performance of C. bungei seedlings. However, inoculation with R. intraradices significantly ameliorated the growth, and alleviated the effects of drought stress. The growth parameters of AMF-inoculated seedlings significantly increased regardless of water status. AMF changed the biomass allocation in seedlings by reducing the root mass ratio (RMR) and root/shoot ratio. AMF-inoculated seedlings displayed higher gas exchange parameters, photosynthetic pigment concentrations, specific leaf area (SLA), but lower specific leaf weight (SLW), regardless of water status. AMF alleviated drought-induced oxidative stress by attenuating the excess generation of reactive oxygen species (ROS), especially H2O2 and O2−, in leaves. Inoculation with AMF under drought stress also dramatically augmented indole-3-acetic acid (IAA) and gibberellins (GA3) levels and the IAA/abscisic acid (ABA) and GA3/ABA ratios, but reduced ABA and zeatin (ZT) levels in leaves. AMF symbiosis improved root morphology and promoted the absorption of nitrogen (N) and phosphorus (P) in seedlings. We conclude that inoculation with R. intraradices is potentially useful for afforestation and cultivation of C. bungei in Northwest China. Furthermore, AMF improved soil structure by increasing the glomalin-related soil protein (GRSP) contents and the proportion of macro-aggregates (0.25–0.5 mm) in the rhizosphere soil.