Since the reform and opening up of China, rural areas in economically developed areas represented by the Yangtze River Delta and Pearl River Delta have undergone unprecedented changes in spatial form. The rural industrialization in the form of township enterprises has not only promoted the rapid development of cities and towns, but also promoted rapid changes in rural space, especially making these areas a semi-urbanization state with both urban and rural characteristics. The characteristics of boundary instability and dynamic variability have caused a series of challenges between human and land relations, which have attracted widespread attention in the academic community. At present, under the national strategic guidance of new urbanization construction, suburban villages in economically developed areas of China are entering a new stage of development, manifested in the evloving of industries from agriculture to non-agriculture, the change of settlement forms from rural to urban, and the transformation of spatial layout from dispersion to agglomeration. In this process, the functional changes and spatial evolution of rural settlements are two important dimensions that characterize the transformation of rural settlements. Based on the above research background, this article takes Guali Town, a representative town in economically developed areas of China Hangzhou, as an example. It selects typical basic units of rural settlements and explores the spatial evolution of Guali rural settlements and their dynamic relationship with functional transformation since the reform and opening up. During the research process, an extensive survey was conducted on 64 villages in Guali Town, and 13 villages with similar natural conditions were selected. Starting from the qualitative analysis of the differential morphology of their 500 m scale samples, the dynamic coupling relationship between the functional transformation and morphological evolution of Guali rural areas was explored. Finally, the implementation path of multi-functional transformation in suburban rural settlements in economically developed areas was explored through the multi-functional transformation process of three typical villages from Guali. The research concludes that: 1) rural functional transformation is a response to changes in economic and social development needs, and is also a process of continuously regenarating and differentiating rural functions. Driven by the forces of marketization, industrialization, urbanization, and other factors, rural areas have generally gone through four stages of transformation and development: functional initiation, functional differentiation, functional conflict, and functional synergy. Some rural areas also have transitions’ leap forward in functional transformation. 2) The evolution of rural settlement morphology and functional transformation are two closely related and interactive processes. Villages as an integration of space and function, the implantation, adjustment, and enhancement of functions of settlements have promoted rural transformation; the transformation of rural functions will also impact the evolution of settlement forms. The rural settlement form of Guali is continuously integrated and upgraded under the basic prototype framework, and the external spatial pattern of the settlement, such as organizational form, spatial layout, and landscape characteristics, has undergone phased changes. At present, its form has shifted from spontaneous disorder to agglomeration and differentiation, and from a single functional stage to a multi-functional collaborative development. 3) The planning of rural settlements should fully adapt to the development trend and phased characteristics of rural functional transformation, laying a solid foundation for achieving high-level collaborative development in rural areas. This study has positive theoretical value and practical guidance for analysing the evolution process of rural settlements in developed areas and exploring their future planning and development strategies.