Reforming cultural policy in Serbia comes into a focus after year 2000. With delegating jurisdiction on the local cultural systems, because one of the ideas is that local government and experts can recognize needs, potential and capacities for local development more clearly and comprehensively. This work deals with the challenges of cultural policy as initiators of sustainable development, where the City of Pancevo has been selected as an example of a good practice. The first part of the text deals with challenges of cultural policy on national level. When it comes to cultural policy development on the Republic level, one can say that participants in culture in Serbia contribute to improving culture every year. However, for more successful cultural policy it is necessary to approach cultural policy challenges in service of sustainable development. Ranking all challenges leads to a conclusion that it is necessary to solve problems such as financing of the institutions, lack of a strategic thinking and insufficient inter-sector, inter -department and international cooperation. The second part of the text is dedicated to the City of Pancevo, as an example of a good practice in cultural policy and sustainable development domain. During 2013. with the support of the IPA fund cross-border cooperation program, the City of Pancevo accomplished Poles of Culture project. Within that project the Center for Study in Cultural Development conducted a research of cultural needs and habits of citizens of Pancevo, cultural institutions and citizen associations within culture. The third part of the text deals with the research results of cultural needs and habits of Pancevo citizens. They represent guidelines for improving the city cultural policy. The fourth part of the text is dedicated to the cultural policy on the local level and recommendations for cultural policy improvement has been given based on the example of the City of Pancevo.