Ostwald was born of German parents who had settled at Riga, now in Latvia. He was educated at the University of Dorpat and the Riga Polytechnic, where he was professor of physics from 1881 until he left to take the chair of physical chemistry at Leipzig in 1887. He retired from his chair in 1906 and spent the rest of his life mainly in literary, philosophical, and editorial work.

Ostwald probably did more than anyone else to establish the new discipline of physical chemistry. He was a great teacher and built up an important research school at Leipzig through which most major chemists passed at some time in their career. He founded in 1887 the Zeitschrift für physikalische Chemie (Journal of Physical Chemistry), the first journal in the world devoted to the new discipline, translated the writings of the American physical chemist Josiah Willard Gibbs into German in 1892, and also produced an inspiring two-volume textbook on the subject, Lehrbuch der allgemeinen Chemie (1885, 1887; Textbook of General Chemistry).

Ostwald's own research was mainly on catalysts, for which he received the Nobel Prize for chemistry in 1909. He defined catalysis in 1894 as “the acceleration of a chemical reaction, which proceeds slowly, by the presence of a foreign substance.” He emphasized that the catalyst for the reaction does not alter the general energy relations or the position of equilibrium. In 1888 he formulated his dilution law, which allows the degree of ionization of a weak electrolyte to be calculated with reasonable accuracy. The Ostwald process (patented in 1902) was an industrial process for oxidizing ammonia to nitric acid.

Philosophically Ostwald was a positivist and denied the reality of atoms until well into the 20th century. The chemist, he argued, does not observe atoms but studies the simple and comprehensive laws to which the weight and volume ratios of chemical compounds are subject. He believed that atoms were a hypothetical conception but by 1908 he had been converted to atomism.

Ostwald's son, Wolfgang, also became a chemist of some note.