Processes of socio-economic restructuring result in reshaping cities and affect all aspects of urban life all over the world. One effect of such processes is urban decline which may be defined as “the relative under-performance of many local urban economies and the resulting mix of economic, social, physical, and environmental exclusion, which often appears to be self-sustaining in the absence of external intervention”.The urban decline, because of spatial concentration, leads to the creation, continuation, and intensification of deteriorated neighbourhoods. In Iran, deterioration of some urban neighbourhoods can be considered as the consequence of contemporary socio-economic transitions. The consequences of urban deterioration are the disequilibrium of main functions in the neighbourhood, the concentration of unstable buildings, lack of public services, and unbalance between driving paths and pavements. The result is the lack of equilibrium, balance, and sustainability in the deteriorated neighbourhoods.The issue of neighbourhood sustainability can be considered from physical, functional, environmental, and social aspects. This paper put an emphasis on the equilibrium and balance between different functions and defines the criteria and indices of a sustainable neighbourhood from functional aspect. To this end, the content of literature is reviewed; then, the status quo of the deteriorated neighbourhoods of Tehran (in relation to the defined indices) is analysed; and finally, the required policy readjustments to enhance functional sustainability in these neighbourhoods is proposed.