Industrial agglomeration in a region changes the economic structure, strategic layout and resource status of a city, and has an important impact on sustainable economic development. The relationship between industrial agglomeration, air pollution and economic sustainability is a key issue concerning the high-quality development of national economy. China is a developing country that once experienced severe air pollution. Now, the Chinese government is aiming to achieve the goal of sustainable and high-quality economic development in China. In this paper, a spatial Dubin model was developed to study the relationship between industry, environment and the economy. The statistical analysis used the air pollutant data of 273 prefecture-level cities in China from 2015 to 2018. The results showed that: (1) there was a positive U-shaped nonlinear relationship between industrial agglomeration and sustainable economic development, and there was a spatial spillover effect. (2) There was a positive U-shaped nonlinear relationship between air pollution and sustainable economic development, and there was a spatial spillover effect between them. (3) The effect of industrial agglomeration on sustainable economic development was influenced by air pollution, an intermediary variable. The existence of air pollution weakens the promoting effect of industrial agglomeration on sustainable economic development.