This paper analyzes the impact of urban-rural income disparity and urbanization on China’s urban income inequality by urban factor income distribution theory model including rural labor run-off and urbanization shock, the results are empirically tested by Chinese provincial panel data. The results show that urban-rural income disparity reinforces urban income inequality, and urbanization can help to relieve urban income inequality, but their role has obvious regional differences. The reason is heterogeneous labor demand elasticity, the effect of urban-rural income disparity and urbanization on urban income inequality is more obvious in lower market level or foreign openness region for its less labor demand elasticity. In order to alleviate urban income inequality, on the one hand, we should narrow urban-rural income disparity and speed up the pace of urbanization to alleviate urban employment pressure, on the other hand, we should improve the marketization level, open wider to the outside world at the same time, so as to reduce factor markets segmentation, increase the labor demand elasticity of urban sector.