Understanding how drought propagates from meteorological to agricultural drought requires further research into the combined effects of soil moisture, evapotranspiration, and precipitation, especially through the analysis of long-term data. To this end, the present study examined a multi-year reanalysis dataset (ERA5-Land) that included numerous drought events across the Iberian Peninsula, with a specific emphasis on the 2005 episode. Through this analysis, the mechanisms underlying the transition from meteorological to agricultural drought and its features for the selected region were investigated. To identify drought episodes, various non-parametric standardized drought indices were utilized. For meteorological droughts, the Standardized Precipitation-Evapotranspiration Index (SPEI) was employed, while the Standardized Soil Moisture Index (SSI), Multivariate Standardized Drought Index (MSDI), and Standard Precipitation, Evapotranspiration and Soil Moisture Index (SPESMI) were utilized for agricultural droughts, while their ability to identify relative vegetation stress in areas affected by severe droughts was investigated using the Fraction of Absorbed Photosynthetically Active Radiation (FAPAR) Anomaly provided by the Copernicus European Drought Observatory (EDO). A statistical approach based on run theory was employed to analyze several characteristics of drought propagation, such as response time scale, propagation probability, and lag time at monthly, seasonal, and six-month time scales. The retrieved response time scale was fast, about 1–2 months, and the probability of occurrence increased with the severity of the originating meteorological drought. The duration of agricultural drought was shorter than that of meteorological drought, with a delayed onset but the same term. The results obtained by multi-variate indices showed a more rapid propagation process and a tendency to identify more severe events than uni-variate indices. In general terms, agricultural indices were found to be effective in assessing vegetation stress in the Iberian Peninsula. A newly developed combined agricultural drought index was found to balance the characteristics of the other adopted indices and may be useful for future studies.