Lake Taihu is the third largest freshwater lake in China. It serves many social, economic, and ecological purposes in the drainage basin. Unfortunately, the water has been heavily polluted due to rapid industrialization and urbanization during the last two decades. Notwithstanding great efforts made so far to improve the water quality, the environmental situation is still far from being optimistic. The basin and the lake are facing a range of severe environmental challenges: rapid socio-economic development continues to place great pressures on the environment, current pollution control projects have many problems from the viewpoint of effectiveness and efficiency of their implementations, and the non-point sources of pollution such as agricultural fields, for which control is more difficult than for industrial point sources, have become the main contributors to serious eutrophication of the lake. Considering the characteristics of the environmental challenges and problems confronting the basin and the lake, we focus on integrated environmental management (IEM) as a promising and effective approach to overcome these predicaments. Current practices and problems of environmental management in the basin are examined, and potential future developments are discussed. Three aspects of the IEM are emphasized: institutional cooperation, public participation, and internalization of environmental externalities. We think these are the most critical for not only the basin but also for the whole of China to achieve a sustainable society.