Local service centre, defined as multi-functional public space providing access to everyday services, promoting social integration and building local identity, is an essential hub in the urban service sector. From the public policy perspective appropriate location and furnishing of local service centres is a basic condition for shaping territorial cohesion. This paper synthesises the to-date knowledge on mechanisms determining the development of service sector in cities, including new phenomena such as decentralisation of urban functions, urban shrinkage, remote services provision or commercialisation of lifestyle. Critical literature review enables the confrontation of various research perspectives and leads to distinguishing key factors affecting the development of urban local service centres in the first half of 21st century and defining the current challenges for public policy.