Abstract Water scarcity is one of the most difficult issues challenging the rapid urbanizing China. It has even evolved to a common constraint to urban development in relatively well-urbanized eastern coastal China. This case study presents the urbanization process, water shortage and water environment changes in Shandong in last decades, and discusses the interaction of urbanization and water utilization. The rapid urbanization has brought about increasing growth of urban water use especially domestic water consumption, giving rise to tension in urban water supply and demand. Great changes in water environment have taken place including groundwater depletion and water table falling, river and spring drying up, sea water intrusion, cone of depression expansion and water quality decline. Due to growing domestic water consumption and limitation of industrial water use reduction, total urban water demand will increase continuously along with urbanization progress. For water shortage plagued Shandong and the similar areas to achieve a sustainable urbanization, integrated measures are highly recommended such as constructing inter-city water resource networks, planning urbanization according to local water conditions, readjusting industrial structure, innovating water management, and paying particular attention to local ecological restoration.