Karl was born in 1770 as the son of the count-hussar captain and chamberlin Ernst Freiherr von Stein zum Altenstein of the Ostheim vor der Rhön branch of the family, and his mother was Juliana Philippina Wilhelmina Freiin von Adelsheim, Ernsts's second wife.
His overseer, Karl August von Hardenberg, quickly recognized his talent and encouraged him to join the diplomatic corps.
Altenstein suggested the cessation of Silesia to France and so was dismissed in June by King Frederick William III at the instigation of Hardenberg.
After the Congress of Vienna in 1815, he, together with Wilhelm von Humboldt in Paris, reclaimed treasures that had been confiscated by Napoleon.
In 1825, he extended compulsory education to the entire country, and in 1834, he introduced a mandatory curriculum for Gymnasiums.