This paper explores challenges and possibilities for integrating goals of long-term sustainable development into urban planning practice, with a specific focus on local institutional conditions for sustainability transitions. The analysis is based on a qualitative single case study of a large urban development process: the development of a new city district in Hyllie in the city of Malmö, Sweden. Hyllie was branded as a flagship project for sustainable urban development, with particularly high ambitions on climate neutrality and sustainable energy consumption. Several innovative elements were initiated in the development process, for instance the "climate contract" between the municipality and large energy companies. In the paper, this climate contract is discussed as an initiative with a promising potential for sustainability transitions. In practice, however, the outcome of the development in Hyllie in terms of sustainable development is ambiguous, since the district is also framed around luxury shopping, entertainment, and an ambition to attract visitors from a long distance. The Hyllie development illustrates pre-requisites for work on sustainable development in a decentralized and market-oriented planning context. Theoretically, the analysis is inspired by the multi-level perspective (MLP) and institutional theory. The results illustrate how the development process was shaped by a complex interplay between actors with differing agendas and targets at different stages in the process. These results are applied in a general discussion of challenges and possibilities for urban planning to contribute substantially to a transition to long-term sustainable development. Overall, the analysis demonstrates the importance of considering specific local institutional conditions in strategic work for long-term sustainability.