The government will spend 1.234 billion yuan (USD 196 million) to protect Lhasa's old urban area, state-run Xinhua news agency reported.
The project was launched yesterday and is expected to be completed by July 2013.
The project includes renovation of water supply and drainage, power lines, pipelines, street lamps and construction of heating facilities.
The appearance of cultural relics, including the World Cultural Heritage Jokhang Temple, will be kept the same.
At the same time, nearby fire hazards will be removed, said Chimed Tsering, Deputy Head of the Chengguan District government.
The old urban area of Lhasa covers an area of 1.33 square km and has a population of 80,000.
China asserts that it is developing Tibet and making efforts to improve the living conditions in the remote Himalayan region, which has witnessed recurring self-immolations by Tibetans.
About 98 people committed self immolations in Tibet in the recent months. China says the suicides were instigated by Tibet's exiled religious leader the Dalai Lama.
