Sugar reduction is a major technical challenge for the food industry, due to effects of sugars in foods on public health. This paper reviews the health effects of dairy products and sugars, with an emphases on the consumption status and dietary recommendation of sugar. The sugar reduction policies in different countries and areas were also illustrated. According to the application and contribution of sugar to the quality of dairy products, the challenges necessity and research progress of sugar reduction in dairy products were discussed. General methods for sugar reduction include gradually decreasing sugar (direct reduction), sugar substitution, food structure modification, and multisensory integration. Decreasing sugar gradually could make the consumers adapt the taste and flavor of low sugar foods, and it might be the most ideal methods to reduce sugar in food. The risk of gradual sugar reduction for food companies in markets makes them prefer to using non-nutritive sweeteners, sugar alcohols, and fibers to substitute sugar in products. Effects of sweeteners on the mouth feel make the sugar reduction be a technical challenge. Advances in food structures could also provide novel ways to reduce sugar in dairy products. The technologies include in the homogeneously distributing sugar, modifying fracture mechanics and modifying tastant release from food matrices. The use of multisensory (aroma, color, and other stimuli) integration principles would be a promising approach.