Circular economy (CE) is an emergent concept that promotes resource circularity in multiple product systems. Modular construction (MC), an evolving construction technique, which includes an off-site manufacturing environment, increasingly supports CE strategies such as reuse due to the elevated potential for design for disassembly (DfD). Design-stage environmental assessments are paramount in aiding the early decision making of modular construction projects to successfully plan and implement DfD strategies. Research on synergising modular construction, circular economy and environmental sustainability is rare in developing economies. Thus, the current study aims to conduct a design-stage life cycle assessment of a DfD and linear versions of a modular building unit in Sri Lanka to evaluate the potential environmental benefits. The life cycle assessment results highlight that the DfD strategy has the lowest environmental impacts in all categories, with a 63% reduction in global warming potential and an approximately 90% reduction in terms of human toxicity compared to the linear version. Further, it showed the elevated potential of reuse compared to recycling practices in improving the environmental performance. Sensitivity assessment revealed that steel was the most sensitive to the change in reuse percentage among main building materials. The analysis outcomes highlight the importance of long-term thinking, architectural design creativity and industrial and technology development to uptake the CE-driven MC in the Sri Lankan context. Finally, strategies are proposed to support the CE approach in MC in developing regions. Both quantitative and qualitative outcomes provide a basis for construction industry stakeholders, academia, and policy makers to explore further and promote modular construction practices to enhance the circularity of building materials and components in developing regions.