Wagner-Jauregg was born at Wels in Austria and educated at the University of Vienna, where he gained his MD in 1880. Finding it difficult to obtain an academic post in orthodox medicine, he turned to psychiatry in 1883 and in 1889 succeeded Krafft-Ebbing as professor of psychiatry at the University of Graz. In 1893 he returned to Vienna as director of the Psychiatric and Neurological Clinic, where he remained until his retirement in 1928.

In 1917 he proposed a new treatment for general paralysis of the insane (GPI), then a relatively common complication of late syphilis. As early as 1887 he had noticed that rare cases of remission were often preceded by a feverish infection, suggesting that the deliberate production of a fever could have a similar effect. Consequently, in 1917 he inoculated nine GPI patients with tertian malaria – a form of malaria that gives a two-day interval between fever attacks. He later reported that in six of these patients extensive remissions had taken place. It was for this work that Wagner-Jauregg received the Nobel Prize for physiology or medicine in 1927. Although therapeutic malaria inoculations were used in the treatment of GPI for some time, demand for them ceased with the discovery of penicillin.

Wagner-Jauregg also proposed in 1894 that cretinism, a thyroid deficiency disease, could be successfully controlled by iodide tablets.