Continuous water-table (WT) measurements from peatlands are scarce and – if existing at all –very short. Consequently, proxy indicators are critically needed to simulate hydrological changes in peatlands over longer time periods. In this study, we demonstrate that tree-ring width (TRW) records of Scots pine (Pinus sylvestris L.) growing in the Čepkeliai peatland (southern Lithuania) can be used as a proxy to reconstruct hydrological variability in a raised bog environment. A two-step modelling procedure was applied to extend existing measurements and to develop a new and longer peatland WT time series. To this end, we used instrumental WT measurements extending back to 2002, meteorological records, a P-PET (difference between precipitation and potential evapotranspiration) series covering the period 1935–2014, so as to construct a tree-ring based time series of WT fluctuations at the site for the period 1870–2014. Strongest correlations were obtained between average annual WT measured at the bog margin and total P-PET over 7 years (r = 0.923, p < 0.00001), as well as between modelled WT and standardized TRW data with a two years lag (r = −0.602, p < 0.001) for those periods where WT fluctuated at the level of pine roots which is typically at <50 cm depth below the peat surface. Our results suggest that moisture is a limiting factor for tree growth at peatlands, but below a certain WT level (<50 cm under the soil surface), drought becomes a limiting factor instead. To validate the WT reconstruction from the Čepkeliai bog, results were compared to Nemunas river runoff since CE 1812 (r = 0.39, p < 0.00001, 1870–2014). We conclude that peatlands can act both as sinks and sources of greenhouse gases in case that hydrological conditions change, but that hydrological lags and complex feedbacks still hamper our understanding of several processes affecting the hydrology and carbon budget in peatlands. We therefore call for the development of further proxy records of water-table variability in peatlands to improve our understanding of peatland responses to climatic changes.