Water as a main driver for sustainable development (SD) should be optimally allocated to different users to support economic, social, and environmental functions. Traditional approaches are not able to account for all the mentioned functions simultaneously, therefore a change in the allocation approaches is necessary. This paper proposes a new framework for inter-sectoral water allocation called “water-constrained green development” (WCGD) to better meet the SD goals. The framework optimally allocates economically-allocable water (EAW), which is the total available water resources left after subtracting the amount of water required for drinking, sanitation, and environment (DSE), to different job classes. It was tested in Sistan Region- a low-developed area in southeast of Iran- which stands on agriculture. In the recent years, because of water crisis, intensity of dust problem, lack of sustained occupation, and immigration, the region’s rate of population growth has been negative. Also, due to decrease of Helmand River inflow, Hamoun wetland, being the major source of food and shelter for the Sistan’s residents, has been degraded. Therefore, Sistan Region needs to take a new development route. The shares of occupation and gross domestic product (GDP) in the agricultural sector of Sistan are respectively 29.1 and 14.8%, whereas they are on average 1 and 7% in Iran. Application of the proposed framework in Sistan Region under three scenarios of available EAW resources showed that the optimal reallocation of water among 15 job classes can improve job availability and GDP of the region currently suffering from poor economy and employment conditions. Based on the optimal job pattern obtained, the share of GDP of Sistan’s agricultural sector drops to 7.1% while the shares of industrial and service sectors increase respectively from 9.7 and 75.4% to 13.7 and 79.2%, which are close to those of the country averages. Also, under the WCGD-based optimal solution, 68, 14, and 18% of people will respectively be employed in service, industry, and agriculture sectors. Additionally, the total available jobs and GDP will increase by 8.9 and 51.1%, respectively, leading to improved socio-economic well-being of the region’s people and protection of its environmental resources.