Mansfield was born Kathleen Mansfield Beauchamp in 1888 into a socially prominent family in Wellington, New Zealand. Her grandfather was Arthur Beauchamp, who briefly represented the Picton electorate in Parliament. Her extended family included the author Countess Elizabeth von Arnim and her great great uncle was the Victorian Artist Charles Robert Leslie. Her father, Harold Beauchamp became the chairman of the Bank of New Zealand and was knighted in 1923. Her mother was Annie Beauchamp, whose brother would marry the daughter of Richard Seddon, tying the family to New Zealand's higher social circles.

She had two older sisters, a younger sister and a younger brother, born in 1894. In 1893 the Mansfield family moved from Thorndon to the country suburb of Karori for health reasons. Here Mansfield spent the happiest years of her childhood, and she used some of her memories of this time as an inspiration for the short story "Prelude".

Her first printed stories appeared in the High School Reporter and the Wellington Girls' High School magazine (the family returned to Wellington proper in 1898), in 1898 and 1899. Her first formally published work appeared the following year in the society magazine New Zealand Graphic and Ladies Journal. In 1902 she became enamoured of a Cellist, Arnold Trowell, although her feelings were for the most part not reciprocated. Mansfield was herself an accomplished Cellist, having received lessons from Trowell's father.

Mansfield travelled in continental Europe between 1903 and 1906, staying mainly in Belgium and Germany. After finishing her schooling in England, she returned to New Zealand, and only then began in earnest to write short stories. She had several works published in the Native Companion (Australia), her first paid writing work, and by this time she had her heart set on becoming a professional Writer. This was also the first occasion on which she used the pseudonym "K. Mansfield". She rapidly grew weary of the provincial New Zealand lifestyle and of her family, and two years later headed back to London. Her father sent her an annual allowance of 100 pounds for the rest of her life. In later years, she expressed both admiration and disdain for New Zealand in her journals, but she was never able to return there because of her tuberculosis.

Mansfield had two romantic relationships with women that are notable for their prominence in her journal entries. She continued to have male lovers, and attempted to repress her feelings at certain times. Her first same-gender romantic relationship was with Maata Mahupuku (sometimes known as Martha Grace), a wealthy young Māori woman whom she had first met at Miss Swainson's school in Wellington, and then again in London in 1906. In June 1907 she wrote: "I want Maata—I want her as I have had her—terribly. This is unclean I know but true." She often referred to Maata as Carlotta. She wrote about Maata in several short stories. Maata married in 1907 but it is claimed that she sent money to Mansfield in London. The second relationship, with Edith Kathleen Bendall, took place from 1906 to 1908. Mansfield also professed her adoration for her in her journals.

After having returned to London in 1908, Mansfield quickly fell into a bohemian way of life. She published only one story and one poem during her first 15 months there. Mansfield sought out the Trowell family for companionship, and while Arnold was involved with another woman Mansfield embarked on a passionate affair with his brother, Garnet. By early 1909 she had become pregnant by Garnet, though Trowell's parents disapproved of the relationship and the two broke up. She hastily entered into a marriage with George Bowden, a singing Teacher 11 years older than she; they were married on 2 March, but she left him the same evening, before the marriage could be consummated. After a brief reunion with Garnet, Mansfield's mother, Annie Beauchamp, arrived in 1909. She blamed the breakdown of the marriage to Bowden on a lesbian relationship between Mansfield and Baker, and she quickly had her daughter despatched to the spa town of Bad Wörishofen in Bavaria, Germany. Mansfield miscarried after attempting to lift a suitcase on top of a cupboard. It is not known whether her mother knew of this miscarriage when she left shortly after arriving in Germany, but she cut Mansfield out of her will.

Mansfield's time in Bavaria had a significant effect on her literary outlook. In particular, she was introduced to the works of Anton Chekhov. She returned to London in January 1910. She then published more than a dozen articles in A.R. Orage's socialist magazine The New Age, and became a friend and lover of Beatrice Hastings, who lived with Orage. Her experiences of Germany formed the foundation of her first published collection, In a German Pension (1911), which she later described as "immature".

In 1911 Mansfield and Murry began a relationship that culminated in their marriage in 1918, although she left him twice, in 1911 and 1913.

In October 1912 the publisher of Rhythm, Charles Granville (sometimes known as Stephen Swift), absconded to Europe and left Murry responsible for the debts the magazine had accumulated. Mansfield pledged her father's allowance towards the magazine, but it was discontinued, being reorganised as The Blue Review in 1913 and folding after three issues. Mansfield and Murry were persuaded by their friend Gilbert Cannan to rent a cottage next to his windmill in Cholesbury, Buckinghamshire in 1913, in an attempt to alleviate Mansfield's ill health. In January 1914, the couple moved to Paris, in the hope that a change of setting would make writing easier for both of them. Mansfield wrote only one story during her time there—"Something Childish But Very Natural"—before Murry was recalled to London to declare bankruptcy.

In 1914 Mansfield had a brief affair with the French Writer Francis Carco. Her visit to him in Paris in February 1915 is retold in her story "An Indiscreet Journey".

Mansfield's life and work were changed in 1915 by the death of her beloved younger brother, Leslie Heron "Chummie" Beauchamp, as a New Zealand soldier in France. She began to take refuge in nostalgic reminiscences of their childhood in New Zealand. In a poem describing a dream she had shortly after his death, she wrote:

In December 1917, Mansfield was diagnosed with tuberculosis. Rejecting the idea of staying in a sanatorium on the grounds that it would cut her off from writing, she moved abroad to avoid the English winter. She stayed at a half-deserted, cold hotel in Bandol, France, where she became depressed but continued to produce stories, including "Je ne parle pas français". "Bliss", the story that lent its name to her second collection of stories in 1920, was also published in 1918. Her health continued to deteriorate and she had her first lung haemorrhage in March.

By April, Mansfield's divorce from Bowden had been finalised, and she and Murry married, only to part again two weeks later. They came together again, however, and in March 1919 Murry became Editor of The Athenaeum, a magazine for which Mansfield wrote more than 100 book reviews (collected posthumously as Novels and Novelists). During the winter of 1918–19 she and Baker stayed in a villa in San Remo, Italy. Their relationship came under strain during this period; after she wrote to Murry to express her feelings of depression, he stayed over Christmas. Although her relationship with Murry became increasingly distant after 1918 and the two often lived apart, this intervention of his spurred her on, and she wrote "The Man Without a Temperament", the story of an ill wife and her long-suffering husband. Mansfield followed her first collection of short stories, Bliss (1920), with another collection, The Garden Party, published in 1922.

In October 1922 Mansfield moved to Georges Gurdjieff's Institute for the Harmonious Development of Man in Fontainebleau, France, where she was put under the care of Olgivanna Lazovitch Hinzenburg (who later married Frank Lloyd Wright). As a guest rather than a pupil of Gurdjieff, Mansfield was not required to take part in the rigorous routine of the institute, but she spent much of her time there with her mentor, Alfred Richard Orage, and her last letters inform Murry of her attempts to apply some of Gurdjieff's teachings to her own life.

Mansfield was a prolific Writer in the final years of her life. Much of her work remained unpublished at her death, and Murry took on the task of editing and publishing it in two additional volumes of short stories (The Dove's Nest in 1923, and Something Childish in 1924); a volume of poems; The Aloe; Novels and Novelists; and collections of her letters and journals.

Mansfield was the subject of the 1973 BBC miniseries A Picture of Katherine Mansfield, starring Vanessa Redgrave. The six-part series included adaptations of Mansfield's life and of her short stories. In 2011, a biopic titled Bliss was made of her early beginnings as a Writer in New Zealand; she was played by Kate Elliott.