The current study evaluates the potential of merged satellite precipitation datasets (MSPDs) against rain gauges (RGs) and satellite precipitation datasets (SPDs) in monitoring meteorological drought over Pakistan during 2000–2015. MSPDs evaluated in the current study include Regional Weighted Average Least Square (RWALS), Weighted Average Least Square (WALS), Dynamic Clustered Bayesian model Averaging (DCBA), and Dynamic Bayesian Model Averaging (DBMA) algorithms, while the set of SPDs is Global Precipitation Measurement (GPM)-based Integrated Multi-Satellite Retrievals for GPM (IMERG-V06), Tropical Rainfall Measurement Mission (TRMM) Multi-Satellite Precipitation Analysis (TMPA 3B42 V7), Precipitation Estimation from Remotely Sensed Information using Artificial Neural Networks (PERSIANN), and ERA-Interim (re-analyses dataset). Several standardized precipitation indices (SPIs), including SPI-1, SPI-3, and SPI-12, are used to evaluate the performances of RGs, SPDs, and MSPDs across Pakistan as well as on a regional scale. The Mann–Kendall (MK) test is used to assess the trend of meteorological drought across different climate regions of Pakistan using these SPI indices. Results revealed higher performance of MSPDs than SPDs when compared against RGs for SPI estimates. The seasonal evaluation of SPIs from RGs, MSPDs, and SPDs in a representative drought year (2008) revealed mildly to moderate wetness in monsoon season while mild to moderate drought in winter season across Pakistan. However, the drought severity ranges from mild to severe drought in different years across different climate regions. MAPD (mean absolute percentage difference) shows high accuracy (MAPD <10%) for RWALS-MSPD, good accuracy (10% < MAPD <20%) for WALS-MSPD and DCBA-MSPD, while good to reasonable accuracy (20% < MAPD < 50%) for DCBA in different climate regions. Furthermore, MSPDs show a consistent drought trend as compared with RGs, while SPDs show poor performance. Overall, this study demonstrated significantly improved performance of MSPDs in monitoring the meteorological drought.