Yogyakarta has experienced unprecedented levels of urbanisation in the last two decades. This places the DIY Province as the second most urbanized province in Indonesia after Jakarta. Urbanization in the province mainly occurs in the surrounding areas of Yogyakarta Municipality, leading to the formation of a relatively large peri-urban region. The peri-urban region of DIY hosts more than 60 percent of the population in the province. The process of urbanization in the peri-urban area has been accompanied by the diversification of the rural economy of the province. This paper aims at assessing the importance of the development of the peri-urban region in rural diversification in the province. The paper begins with a review of some theoretical issues, followed by an account of the present situation of the peri-urban region of Yogyakarta, its relationship with the growing rural diversification in the province and the future of peri-urban regions in the province.