During the rapid industrialization and urbanization of China, urban agglomeration in river basin areas raises the problems of over-use of water resources and pollution of the water environment. Related research in China has mainly focused on the conflicts among economic growth, urban expansion and water resource shortages within administrative boundaries. However, water environments are much more dependent on their physical boundaries than their administrative boundaries. Consistent with the nature of water environment, this study aims at analyzing coordination relationships between urban development and water environment changes within physical river basin boundaries. We chose the Shayinghe River Basin, China, as our case study area which is facing serious challenges related to water environment protection. Then we classified 35 county-level administrative units into upstream, midstream and downstream regions based on their physical characteristics; analyzed the coordination degree of urban agglomeration using the Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) method; and constructed cooperative models using the Linear Programming (LP function) to simulate four scenarios of the coordination relationship between urban population increase and water environment protection based on existing water resources and water pollution data. The results show that the present coordinative situation in Shayinghe River Basin is not sustainable. In general, more than 50% administrative units are in the bad coordinative situation. In particular, the downstream region is under worse condition than the upstream and midstream regions. Cooperative models in scenario analyses indicate that the population scale set in existing urban master plannings is not coordinated with the water environment protection. To reach the goal of regional sustainable development, the total population needs to be controlled such that it will remain at 4.5 × 107 or below by 2020 given the capacity of water environment.