<p>The booming development of digital economy has profoundly impacted both socioeconomic system and urban spatial structure in China. This paper measures a digital economy development index, innovation development level, and the industrial agglomeration level of 264 prefecture-level cities in China from 2011 to 2019. We use LandScan global population dynamics raster data to measure urban sprawl index. We further empirically test the impact and mechanism of digital economy on urban spatial structure in China. The results indicate that digital economy significantly inhibits urban sprawl, and the improvements of innovation level and industrial agglomeration level are important mechanisms. The results remain valid after robustness tests, which include selecting historical data and spherical distance data as instrumental variables, and introducing the “Broadband China” pilot policy as a quasi-natural experiment. The results suggest that the negative impact of digital economy on urban sprawl is characterized by a nonlinear incremental “marginal effect” and spatial spillover effect, and digital economy has a stronger inhibitory effect on urban sprawl when the levels of urban innovation, industrial agglomeration, economic development, and city scale exceed a critical threshold. The heterogeneity results show that the inhibitive effects of digital economy are more significant for eastern cites, central cities, and expanding cities. This paper provides a new reference and empirical evidence for understanding the geographical spatial impact of digital economy, and provides a decision-making reference for better optimizing urban spatial structure from the perspective of digital economy.</p>