Born in Fürth, Wassermann was the son of a shopkeeper and lost his mother at an early age.

Because his father was reluctant to support his literary ambitions, he began a short-lived apprenticeship with a businessman in Vienna after graduation.

Around this time he also became acquainted with other writers such as Rainer Maria Rilke, Hugo von Hofmannsthal, and Thomas Mann.

In 1896, he released his first novel, Melusine (his surname means "water-man" in German, while a "Melusine" (or "Melusina") is a figure of European legends and folklore, a feminine spirit of fresh waters in sacred springs and rivers).

His most important works are considered the novel The Maurizius Case (Der Fall Maurizius, 1928) and the autobiography, My Life as German and Jew (Mein Weg als Deutscher und Jude, 1921), in which he discussed the tense relationship between his German and Jewish identities.