This study has been conducted with an objective to explore the impact of foreign aid and government stability on environmental degradation in selected developing countries by establishing three categories. The first category of countries comprises Bangladesh, Ethiopia, Kenya and Zimbabwe; the second category comprises middle income countries like India, Indonesia, Nigeria and Pakistan while the third category contains upper middle income countries including Brazil, China, Turkey and Thailand. The two stage linear regression analysis panel data technique was applied by using the data from 1996 to 2010 to check that how foreign aid and government stability effect the environmental degradation. This study has used three different indicators of environmental degradation that are CO2, SO2 and PM10. The individual effect of all these variables have been checked separately by using different instruments TSLS approach while the combined effect have been checked by developing pollution index through PCA, in pollution index environmental variables(CO2, SO2 and PM10) have been used simultaneously. The findings of this research demonstrate that foreign aid and government stability has positive and significant impact on environment in low, middle and upper middle income countries. Furthermore, the study finds the empirical evidence that if foreign aid is conditioned with the government stability in the aid recipient country then environmental standards can be achieved .The results of present study favor the theory that foreign aid and government stability is helpful in the preservation of environment. Supervisor: Dr. Shujaat Farooq