California governor Arnold Schwarzenegger has declared a state of emergency because of a severe drought.

The governor said the drought was having "a devastating impact" on people, the economy and environment. He urged the state's cities and towns to cut water consumption by 20%, or face the prospect of compulsory cuts.

The state water director said three years of below-average rainfall could cost California an estimated $3bn and 95,000 jobs.

"This drought is having a devastating impact, making today's action absolutely necessary," Schwarzenegger said. "We have a water system that is for 18 million people; now we are 38 million. We've got to go and redo our water system, bring it up to date."

Three dry winters have left California's reservoirs at their lowest levels since 1992.