An abrupt climate warming of 5 to 10 degrees C during the Palaeocene/Eocene boundary thermal maximum (PETM) 55 Myr ago is linked to the catastrophic release of approximately 1,050-2,100 Gt of carbon from sea-floor methane hydrate reservoirs. Although atmospheric methane, and the carbon dioxide derived from its oxidation, probably contributed to PETM warming, neither the magnitude nor the timing of the climate change is consistent with direct greenhouse forcing by the carbon derived from methane hydrate. Here we demonstrate significant differences between marine and terrestrial carbon isotope records spanning the PETM. We use models of key carbon cycle processes to identify the cause of these differences. Our results provide evidence for a previously unrecognized discrete shift in the state of the climate system during the PETM, characterized by large increases in mid-latitude tropospheric humidity and enhanced cycling of carbon through terrestrial ecosystems. A more humid atmosphere helps to explain PETM temperatures, but the ultimate mechanisms underlying the shift remain unknown.