To mitigate forest loss under current environmental challenges, it is increasingly urgent to model how tree mortality is mediated by both biotic and abiotic agents. However, the role of neighborhood interactions in mediating tree survival in dryland forests has been poorly understood, as it is often presupposed to be irrelevant in low-density stands coupled with overriding drought stress. Here, we conducted a failure time analysis of Populus euphratica forests (known as Tugay forests) in the Tarim River corridor (NW China) to examine the presupposition. We collected a spatial-explicit population inventory dataset with >7000 trees on ca. 14-ha land area with varying vapor pressure deficit (VPD), groundwater table depth (GWD), and stand density. Hegyi's competition index (CI) and stand density index (SDI, the number of large trees with an equivalent diameter of 25.4 cm) were employed to characterize neighborhood structures of each individual tree. Aridity stresses (higher VPD and GWD) tended to elevate tree mortality risk, and showed weaker effects than neighborhood structures did. Tree mortality risk increased drastically with higher CI, suggesting a strong role of competition for critical water resource. However, tree mortality risk reduced with higher SDI, likely due to ameliorated stresses of excessive light and/or temperature under less open canopies. This study highlights the importance of localized inter-tree interactions in regulating tree populations under prevalent drought stress and reiterates classic cautions against inferences about competition/facilitation in absence of spatial-explicit contexts. We recommend the priority of preserving large trees aggregated as closed stands in dryland forest conservation.