At the time when Ulaanbaatar was founded as Urga in 1639 by Genghisid nobles, Mongolia was actually a serious contender for power in East Asia. The last Great Khan, Ligdan, had died in 1634, and Manchus were rising in the east — but the independent Mongols had been revitalized by a Buddhist renaissance in the 1570s, and raids under Altan Khan were carried out as far afield as Beijing. A firmer union of the Western Oirats and Eastern Genghisids would have sufficed to fend off the Manchus. The 1640 Mongol-Oirad Code of Law united the East and West, but this union failed to last long. What did survive from this period was the union of the Eastern Mongols cemented in 1639 with the founding of Urga. The Mongol nobles installed one of their own, Zanabazar, the son of Tüsheet Khan Gombodorj (1594-1655) and a direct descendant of Genghis Khan, as the supreme lama of the Mongols. His residence, called Örgöö or Urga, meaning "palace-yurt", was some 250 km west of the current site of the city, near the ancient Mongol capital of Karakorum. In 1651, the first Jebtsundamba Khutughtu, Zanabazar, returned from studies in Tibet and established seven monastic departments in Urga. The mobile monastery gradually became a mobile city, moving every few years as needed. Urga was moved 25 times between its founding in 1639 and settling in its current location in 1778, by which time it had several thousand tents and temples and was served by trade routes from China and Russia. It was also estimated to have about 10,000 monks. The Gandan Monastery was established in 1809 and became the center of learning for all of Mongolia, and one of the most important monasteries in Tibetan Buddhism.

The city continued to grow through the 19th century as a provincial capital of the Qing Empire and a center of religion and trade. Russian influence in Mongolia became significant in the late 18th Century, and a two-storey Russian consulate was opened in 1865 as an upgrade from the 18th-century wooden quarters of the Russian representative. Mongolia was, in practice, a buffer between Russia and China, with plenty of local autonomy through the Bogd Jebtsundamba and Mongolian nobles.