The growing urbanization and environmental challenges necessitate innovative approaches to sustainable construction. This literature review examines the integration of circular economy principles into modular construction practices for sustainable urban development. Through a systematic review of 30 peer-reviewed studies, this paper analyzes how circular economy concepts such as material reuse, design for disassembly, waste minimization, and life cycle optimization can be effectively implemented in modular construction systems. The findings reveal significant potential for reducing environmental impact, improving resource efficiency, and enhancing economic viability in urban development projects. Key applications include standardized component design, material passports, digital twin technologies, and closed-loop supply chains. The review identifies critical success factors including policy support, industry collaboration, and technological innovation. Recommendations include developing standardized circular design protocols, establishing material banks, and creating regulatory frameworks that incentivize circular practices in modular construction. This integration represents a promising pathway toward achieving sustainable urban development goals while addressing the global housing crisis and environmental degradation.