The urbanization process is complex and lengthy, typically resulting in dual changes in the socioeconomic structure and ecological environment. However, in the context of arid environments and initial urbanization, emerging towns undergo evolutionary processes different from those of traditional cities. This study focuses on a typical town, analyzing its growth under the combined effects of arid conditions and incipient urbanization. The results reveal a unique urbanization trajectory in the hinterland of southern Xinjiang: transitioning from refined agricultural planting to shrubland and bare land dominated by natural factors and then to impervious surfaces. While the pattern was complex, the direction of transition was clear. Using the town’s establishment in 2014 as a critical node for urbanization initiation, shrubland emerged as the most sensitive land type, with a proportional increase by a factor of 2.6 from 2010 to 2015. This was driven by the abandonment of cultivated land, which decreased by 11.3% during the study period, with 78% of the newly added shrubland area converted from cropland. By applying the Markov model together with the InVEST model, the study predicted urban land-use transition patterns over the next 5 years and revealed that urbanization primarily exacerbates the instability of water yield in the surrounding region. This study uniquely addresses the gap in understanding the impacts of the urbanization process of emerging towns in arid regions and its associated ecological processes. A detailed investigation of such urbanization is crucial to mitigating issues like disorderly land use and promoting the sustainable development of small and medium-sized towns.