Interpretation of the impact of climate change or climate variability on water resources management requires information at scales much smaller than the current resolution of regional climate models. Subgrid-scale variability of precipitation is typically resolved by running nested or variable resolution models or by statistical downscaling, the latter being especially attractive in ensemble predictions due to its computational efficiency. Most existing precipitation downscaling schemes are based on spatial disaggregation of rainfall patterns, independently at different times, and do not properly account for the temporal persistence of rainfall at the subgrid spatial scales. Such a temporal persistence in rainfall directly relates to the spatial variability of accumulated local soil moisture and might be important if the downscaled values were to be used in a coupled atmospheric-hydrologic model. In this paper we propose a rainfall downscaling model which utilizes the presence of dynamic scaling in rainfall [Venugopal et al., 1999] and which in conjunction with a spatial disaggregation scheme preserves both the temporal and spatial correlation structure of rainfall at the subgrid scales.