The increasing population and need for water in drylands, along with climate change, are exerting extra pressure on freshwater resources. The study develops a multi-sector optimization model at the regional level to explore the economic implications of treated municipal wastewater (TMW) reuse in drylands, using the Middle Rio Grande Basin (MRGB) in New Mexico as a case study. The study considers the agricultural sector as a nutrient sink and develops a theoretical optimization model of TMW reuse across urban, environmental, and agricultural sectors in drylands. Then, applied to the MRGB to identify the optimal allocation of TMW across the three sectors in the basin. A nonmarket evaluation technique is used to estimate the value of water in each sector and these estimates are used as inputs to our multi-sector optimization model. Results show that the environmental sector has the highest marginal economic value of water at $1,625/AF, followed by the urban sector at $209/AF and the agricultural sector at $32.08/AF. This recommends that in the study area, higher priority should be given to the maintenance and protection of the environmental sector, followed by the urban sector and then the agricultural sector. Though, the agricultural sector is a nutrient sink and TMW provides more non-market value to the sector, the value of water in the sector is very low as compared to other sectors. The study underscores that obtaining information on the economic value of water in different sectors across a region is critical for the optimal allocation of scarce water resources in the region.