Protecting the world's oldest nature reserve from the planet's most polluted capital was never going to be easy, but the Mongolian authorities and the World Bank aim to do just that in the coming days when they meet to discuss a plan to limit the sprawl of Ulan Bator.

A major push to conserve the nearby forests, mountains and globally important biodiversity of the Bogd Khan protected area has been on hold for more than a year, but there are hopes for a breakthrough if the authorities can be more transparent about the controversial property deals that have encroached on the reserve.

The outcome will be an indicator of Mongolia's determination to protect its environment as the country enters a period of rapid economic growth and urbanisation that has recently led to the opening of several mega mines in the Gobi desert and a thickening haze above Ulan Bator - recently named the world's second most polluted city.

Bogd Khan - that sits on the southern flank of the capital - is considered sacred by many Mongolians and was designated a protected reserve in 1778, almost 100 years before Yellowstone national park in the US. It has also been recognised as a Unesco biosphere reserve. Despite this status, it is under increasing pressure from construction firms, tourist companies and city residents desperate for clean air.

Mongolian authorities have permitted a growing number of construction sites under a "limited use" clause that is supposed to apply only to research sites and tourist information centres. But video of the most affected areas, such as Zaisan valley, suggest parts of the reserve are becoming suburbs of the capital with apartment blocks, fences and an international school. A major driver is luxury homes for people who want to escape the sulphurous smog caused each winter by hundreds of thousands of wood and coal-burning stoves.

"To avoid pollution, people are moving into the Bogd Khan protected area," said Khulan Munkh-Erdene of WWF Mongolia. "People apply for permission to build tourist resorts but then they build apartments and other kinds of building."

The hold-up may also be related to the fact that the authorities appear to be breaking their own rules. Among the construction sites in the "strictly protected area" is one for the country's new constitutional court.

"The court is being built to rule on laws, but it is breaking them itself. It's kind of funny," said Kirk Olson, a biologist based in Ulan Bator. "A lot of steam comes out of people's ears when you talk about Bogd Khan. They have rules that they are not following because they are not convenient. They put short-term profits above public good."

Although there is considerable public anger about the construction, there is also a recognition that it is too late to do anything about existing developments.

The World Bank wants to halt new projects in Bogd Khan until the approval process is opened up to public scrutiny through website releases of planning applications. Very few are thought likely to qualify if the system is made more open and civil society is given time and opportunity to mount challenges.

As a rare democracy in a region dominated by China and Russia, Mongolia is often hailed as a model of accountability and transparency. But the talks on Bogd Khan have proved difficult.

Government officials have been hesitant to publicly disclose details about the lucrative land deals in Bogd Khan, though disclosure is a key condition for a nearly $2m project funded by the Global Environment Facility to make the reserve into a national model.

"Our plan was supposed to have come into effect last year, but World Bank staff are still negotiating with the ministry of environment," said Tony Whitten, formerly the leader of the project preparation team at the World Bank. "Everyone still wants to implement this project. But the land developments are a sensitive, politicised issue involving many interest groups."

A spokesman for the Ministry of Nature, Environment and Tourism, Batbold Dorjgurkham, said he was unable to comment.

His reticence may reflect the difficulty faced by the government in navigating between unrestricted economic expansion and cautious environmental controls.