Lassalle came from a prosperous Jewish family in Loslau later Breslau, Silesia; his father was a silk merchant and intended his son for a business career, sending him to the commercial school at Leipzig. Lassalle himself, however, had other plans and got himself transferred to university, first in Breslau and afterwards in Berlin. His favourite studies were philology and philosophy; he became a close follower of Hegel. Having completed his university studies in 1845, he began to write a work on Heraclitus from the Hegelian point of view; but it was soon interrupted and was not published until 1858.

It was in Berlin, towards the end of 1845, that he met Countess Sophie von Hatzfeldt. She had been separated from her husband for many years, and had problems with him on questions of property and the custody of their children. Lassalle attached himself to the countess's cause, made special study of law, and, after bringing the case before thirty-six tribunals, reduced the count to a compromise on terms favourable to his client. The court case, which lasted ten years, gave rise to some scandal, especially that of the Cassettengeschichte (Casket Affair), which pursued Lassalle all the rest of his life. This arose out of an attempt by the countess's friends to get possession of a bond for a large life annuity settled by the count on his mistress, Baroness von Meyendorff, to the disadvantage of the countess and her children. Two of Lassalle's comrades succeeded in carrying off the casket, which contained jewels, from the baroness's room at a hotel in Cologne. They were prosecuted for theft, one of them being condemned to six months imprisonment. Lassalle, accused of moral complicity, was acquitted on appeal.

Lassalle took part in the revolutions of 1848 - 49; as a result he underwent a year's imprisonment in 1849 for resistance to the authorities of Düsseldorf and was banned from living in Berlin. Until 1859 Lassalle resided mostly in the Rhineland, dealing with the suit of the countess, and finishing the work on Heraclitus. In this time he was not much involved in political agitation, but remained interested in the labour movement.

In 1859 Lassalle returned to Berlin, entering the city disguised as a carter, and, through the influence of Alexander von Humboldt with the king, received permission to stay there. The same year he published a pamphlet on the war in Italy and how Prussia should act: he warned Prussia against going to the rescue of Austria in her war with France. He pointed out that if France drove Austria out of Italy it would be able to annex Savoy, but would not be strong enough to prevent Italian unification under King Victor Emmanuel. Prussia, he said, should form an alliance with France to drive out Austria and also to gain power in Germany. In 1861 Lassalle published System der erworbenen Rechte (System of Acquired Rights) on this subject.

In early 1862, the struggle had begun between Otto von Bismarck and the liberals in Prussia. Lassalle believed that the liberal politician Hermann Schulze-Delitzsch's co-operative schemes on the principle of self-help were utterly inadequate to improve the condition of the working classes. Lassalle himself had a fashionable, extravagant lifestyle, but now he threw himself into a new career as a political agitator, travelling around Germany, giving speeches and writing pamphlets, in an attempt to organise and rouse the working class. Although Lassalle was a member of the Communist League, his politics were strongly opposed by Karl Marx and Friedrich Engels; indeed Marx's essay Critique of the Gotha Program is written in part as a reaction to Lassalle's conception of the socialist state. Marx and Engels thought that Lassalle was not a true Communist as he directly influenced Bismarck's government (in secret albeit) on the issue of universal suffrage, among others. Élie Halévy would later write on this situation:

As a result, when Lassalle founded the Allgemeiner Deutscher Arbeiterverein (General German Workers' Association, ADAV) on 23 May 1863, Marx's supporters in Germany did not join it. Lassalle was the first president of the ADAV, which was the first German labour party, from 23 May 1863 to 31 August 1864. This party later became the Social Democratic Party of Germany (SPD).

The SPD was formed in 1875, when the ADAV merged with the SDAP (Social Democratic Workers' Party of Germany), to a great extent due to Lassalle's efforts. Lassalle wanted to participate in German politics. Wilhelm Liebknecht and August Bebel, who were Marxists and opposed reformist politics, also joined the party. From its founding, the Social Democratic Party was divided between those who advocated reform and those who advocated revolution.

In Berlin, Lassalle had met a young woman, Hélène von Dönniges, and in the summer of 1864 they decided to marry. She, however, was the daughter of a Bavarian diplomat then resident at Geneva, who would have nothing to do with Lassalle. Hélène was imprisoned in her own room, and soon, apparently under pressure, renounced Lassalle in favour of another admirer, Count von Racowitza. Lassalle sent a challenge both to the lady's father and to Racowitz, which was accepted by the latter. At the Carouge, a suburb of Geneva, a duel took place on the morning of 28 August 1864. Lassalle was mortally wounded, and he died on August 31. The final events of his life were described in George Meredith's novel The Tragic Comedians (1880). He is buried in Breslau (now Wrocław), in the old Jewish cemetery.