Against the backdrop that urbanization in sub-Sahara African (SSA) countries, including Ethiopia, has occurred without the attendant growth and development spillovers; and that the inherent benefits of urbanization are threatened by the fast pace of urbanization, unparalleled speed and the uneven spatial spread, This paper posits that this challenge and indeed urban management can be address through a proxy regional planning tool; cluster formation. Settlement cluster formation that focuses on the potentials of small and medium towns. Small and Medium towns are supposed to represent a necessary link between the complex, sophisticated urban life and the simple, undiluted rural existence. They tend to combine the attributes of the two space-economies (Urban and Rural). They are, therefore, instruments through which the much desired rural-urban linkages can be strengthened for sustainable urbanization. The focus of the paper is on Regulating Urbanization in Ethiopia through Clustering of Settlements as a tool in Urbanization and Urban Management. Information and data assemblage was carried out through a review of urbanization issues; such as trends, local economic development opportunities, and urbanization options amongst others. This was further strengthened with a desktop analysis of pertinent government documents. The findings reveal that economic and settlement clusters within the framework of existing urban dynamism (small and medium town) can be formed in Ethiopia. It can serve as a reliable instrument for settlement stabilization and consequently sustainable urbanization. The paper recommends deliberate dispersal of mini-industrial and commercial corridors via Cluster formation as a major instrument for deflecting the army of migrants.