Taihu Lake, the third largest freshwater lake in China, is located in the Chanjiang Delta of the Yangtze River. Its waters are used by agriculture, industry and as major drinking water for several cities including Shanghai and Wuxi. The lake also is important for tourism, aquaculture and flood control. Taihu Lake and its surrounding areas are facing three major water-related threats: deteriorating water quality with inflow and runoff from its watershed; flooding during the rainy seasons; and water shortages during drier months. Noxious algae blooms are occurring with increasing frequency and water quality continues to decline. Remedial actions implemented to date have been ineffective. This paper proposes that the problems could be remedied by constructing a by-pass channel (BPC), which would divert low-quality water from the lake during low precipitation periods and allow better quality water to flow into the lake during high flow periods. This remedial action would simultaneously deal with the deteriorating water quality of Lake Taihu and maintain its water level at a desired level. A preliminary assessment of this strategy shows that, if the BPC were implemented, the water quality of Taihu Lake would be improved significantly in few years, the flood disaster would be greatly mitigated, and the water shortage problem in the basin would be alleviated.