<p>Impacts of climate change are experienced in many ways throughout the economy, natural environment and in the livelihoods of local communities. However, rapid warming, glacier retreat, altered precipitation patterns, and disruptions to ecosystems are putting people and mountain watersheds at peril. Therefore, there is an urgent need for community-preferred strategies that align with community adaptive capacity and preferences to ensure sustainable watershed management to protect mountain ecosystems and livelihoods. However, empirical and evidence-based adaptation strategies are often scarce. This study aims to fill this gap by exploring the adaptation preferences of mountain communities in the <i>Khageri Khola</i> watershed of Nepal and provides some novel approaches by integrating the adaptive capacity framework with a choice experiment (CE) to explore preferences and willingness to participate for watershed management and climate change adaptation. Primary data were collected through in-depth, semi-structured expert interviews (<i>n</i> = 16) representing diverse backgrounds from academia, non-governmental organizations (NGOs), community-based organizations (CBOs), and government agencies, possessing over a decade of field experience in watershed management and in-person household surveys (<i>n</i> = 440). Data were analyzed using Random Parameter Logit (RPL) to understand community preferences and willingness regarding various adaptation strategies and Latent Class Model (LCM) to explore preferences based on topographic and socio-demographic characteristics. Among the ten potential strategies included for assessment, five strategies—i) equipping local communities with technology and technology transfer; ii) implementing nature-based solutions; iii) establishing watershed-level multi-stakeholder institutions; iv) policy formulation based on existing practice and learning; and v) empowering local individuals and organizations—were found to be statistically significant and preferred for adaptation. The results also indicated diversity in preferences based on topographic and socio-demographic characteristics between respondents from upstream and downstream of the watershed. The study developed three distinct watershed management scenarios tailored to decentralized policies and frameworks, offering a roadmap for policymakers and practitioners to foster watershed management in a rapidly changing climatic and socio-economic context of Nepal.</p>