He was born in Terre Haute, Indiana, into a strict German-American family. The popular songwriter Paul Dresser (1859-1906) was his older brother. From 1889-1890, Theodore attended Indiana University at Bloomington before flunking out. Within several years, he was writing for the Chicago Globe newspaper and then the St. Louis Globe-Democrat. In 1892 he married Sara White. Although they separated in 1909, they were never formally divorced.

His first novel, Sister Carrie (1900), tells the story of a woman who flees her country life for the city (Chicago, Illinois) and falls into a wayward life of sin. The publisher did little to promote the book, and it sold poorly. Dreiser took a job editing women's magazines until he was forced to resign in 1910 because of an intraoffice romance. His second novel, Jennie Gerhardt, was published the following year. Many of Dreiser's subsequent novels dealt with social inequality.

His first commercial success was An American Tragedy (1925), which was made into a film in 1931 and again in 1951.

Other works include the Trilogy of Desire about Frank Cowperwood, a fictionalized version of Charles Yerkes: The Financier (1912), The Titan (1914), and The Stoic (completed posthumously in 1947).

In 1935 the library trustees of Warsaw, Indiana ordered the burning of all the library's works by Dreiser.

Dreiser's style is marked by long sentences and intense attention to detail. Since his works deal with social status and the pursuit of material goods and pleasures, this level of realism and description services his theme; on the other hand, it can make many of his works, particularly Sister Carrie, difficult for some. It should be noted that Dreiser is not well-regarded for his style, but for the realism of his work, character development, and his points-of-view on American life. Still, he is known to have had an enormous influence on the generation that followed his. In his tribute "Dreiser" from Horses and Men (1923), Sherwood Anderson writes:

Heavy, heavy, the feet of Theodore. How easy to pick some of his books to pieces, to laugh at him for so much of his heavy prose... The fellows of the ink-pots, the prose writers in America who follow Dreiser, will have much to do that he has never done. Their road is long but, because of him, those who follow will never have to face the road through the wilderness of Puritan denial, the road that Dreiser faced alone. Humorist Corey Ford (writing as "John Riddell") quipped that Dreiser had only one plot: Boy meets Girl = Tragedy.

Renowned mid-century literary critic Irving Howe spoke of Dreiser as "among the American giants, one of the very few American giants we have had."