Rain gauges, weather radars, satellite sensors and modelled data from weather centres are used operationally for estimating the spatial-temporal variability of rainfall. However, the associated uncertainties can be very high, especially in poorly equipped regions of the world. Very recently, an innovative method, named SM2RAIN, that uses soil moisture observations to infer rainfall, has been proposed by Brocca et al. (2013) with very promising results when applied with in situ and satellite-derived data. However, a thorough analysis of the physical consistency of the SM2RAIN algorithm has not been carried out yet. In this study, synthetic soil moisture data generated from a physically-based soil water balance model are employed to check the reliability of the assumptions made in the SM2RAIN algorithm. Next, high quality and multiyear in situ soil moisture observations, at different depths (5-30 cm), and rainfall for ten sites across Europe are used for testing the performance of the algorithm, its limitations and applicability range. SM2RAIN shows very high accuracy in the synthetic experiments with a correlation coefficient, R, between synthetically generated and simulated data, at daily time step, higher than 0.940 and an average Bias lower than 4%. When real datasets are used, the agreement between observed and simulated daily rainfall is slightly lower with average R-values equal to 0.87 and 0.85 in the calibration and validation periods, respectively. Overall, the performance is found to be better in humid temperate climates and for sensors installed vertically. Interestingly, algorithms of different complexity in the reproduction of the underlying hydrological processes provide similar results. The average contribution of surface runoff and evapotranspiration components amounts to less than 4% of the total rainfall, while the soil moisture variations (63%) and subsurface drainage (30%) terms provide a much higher contribution. Overall, the SM2RAIN algorithm is found to perform well both in the synthetic and real data experiments, thus offering a new and independent source of data for improving rainfall estimation, and consequently enhancing hydrological, meteorological and climatic studies.