Zweig was born in Vienna, the son of Moritz Zweig (1845–1926), a wealthy Jewish textile manufacturer, and Ida Brettauer (1854–1938), a daughter of a Jewish banking family. He was related to the Czech Writer Egon Hostovský, who described him as "a very distant relative"; some sources describe them as cousins.

At the beginning of World War I, patriotic sentiment was widespread, and extended to many German and Austrian Jews: Zweig, as well as Martin Buber and Hermann Cohen, showed support. Zweig served in the Archives of the Ministry of War and adopted a pacifist stand like his friend Romain Rolland, recipient of the Nobel Prize in Literature 1915. Zweig married Friderike Maria von Winternitz (born Burger) in 1920; they divorced in 1938. As Friderike Zweig she published a book on her former husband after his death. She later also published a picture book on Zweig. In the late summer of 1939, Zweig married his secretary Elisabet Charlotte "Lotte" Altmann at Bath, England. Zweig's secretary in Salzburg from November 1919 to March 1938 was Anna Meingast (13 May 1881, Vienna – 17 November 1953, Salzburg).

Zweig studied philosophy at the University of Vienna and in 1904 earned a doctoral degree with a thesis on "The Philosophy of Hippolyte Taine". Religion did not play a central role in his education. "My mother and father were Jewish only through accident of birth," Zweig said later in an interview. Yet he did not renounce his Jewish faith and wrote repeatedly on Jews and Jewish themes, as in his story Buchmendel. Zweig had a warm relationship with Theodor Herzl, the founder of Zionism, whom he met when Herzl was still literary Editor of the Neue Freie Presse, then Vienna's main newspaper; Herzl accepted for publication some of Zweig's early essays. Zweig believed in internationalism and in Europeanism, as The World of Yesterday, his autobiography, makes clear. According to Amos Elon, Zweig called Herzl's book Der Judenstaat an "obtuse text, [a] piece of nonsense".

Zweig was a prominent Writer in the 1920s and 1930s, befriending Arthur Schnitzler and Sigmund Freud. He was extremely popular in the United States, South America and Europe, and remains so in continental Europe; however, he was largely ignored by the British public. His fame in America had diminished until the 1990s, when there began an effort on the part of several publishers (notably Pushkin Press, Hesperus Press, and The New York Review of Books) to get Zweig back into print in English. Plunkett Lake Press has reissued electronic versions of his non-fiction works. Since that time there has been a marked resurgence and a number of Zweig's books are back in print.

Zweig acknowledged his debt to psychoanalysis. In a letter dated 8 September 1926, he wrote to Freud, "Psychology is the great Business of my life". He went on explaining that Freud had considerable influence on a number of Writers such as Marcel Proust, D.H. Lawrence and James Joyce giving them a lesson of "courage" and helping them overcome their inhibitions, "Thanks to you, we see many things. – Thanks to you we say many things which otherwise we would not have seen nor said." Autobiography, in particular, had become "more clear-sighted and audacious."

In 1934, following Hitler's rise to power in Germany, Zweig left Austria for England, living first in London, then from 1939 in Bath. Because of the swift advance of Hitler's troops westwards, Zweig and his second wife crossed the Atlantic to the United States, settling in 1940 in New York City; they lived for two months as guests of Yale University in New Haven, Connecticut, then they rented a house in Ossining, New York.

Zweig enjoyed a close association with Richard Strauss, and provided the libretto for Die schweigsame Frau (The Silent Woman). Strauss famously defied the Nazi regime by refusing to sanction the removal of Zweig's name from the programme for the work's première on 24 June 1935 in Dresden. As a result, Goebbels refused to attend as planned, and the opera was banned after three performances. Zweig later collaborated with Joseph Gregor, to provide Strauss with the libretto for one other opera, Daphne, in 1937. At least one other work by Zweig received a musical setting: the Pianist and Composer Henry Jolles, who like Zweig had fled to Brazil to escape the Nazis, composed a song, "Último poema de Stefan Zweig", based on "Letztes Gedicht", which Zweig wrote on the occasion of his 60th birthday in November 1941. During his stay in Brazil, Zweig wrote Brasilien, Ein Land der Zukunft (Brazil, Land of the Future) which was an accurate analysis of his newly adopted country; in this book he managed to demonstrate a fair understanding of the Brazilian culture that surrounded him.

On 22 August 1940, they moved again to Petrópolis, a German-colonized mountain town 68 kilometres north of Rio de Janeiro. Zweig, feeling increasingly depressed about the situation in Europe and the Future for humanity, wrote in a letter to author Jules Romains, "My inner crisis consists in that I am not able to identify myself with the me of passport, the self of exile". On 23 February 1942, the Zweigs were found dead of a barbiturate overdose in their house in the city of Petrópolis, holding hands. He had been despairing at the Future of Europe and its culture. "I think it better to conclude in good time and in erect bearing a life in which intellectual labour meant the purest joy and personal freedom the highest good on Earth," he wrote.

Zweig's memoir, The World of Yesterday, was completed in 1942 one day before he committed suicide. It has been widely discussed as a record of "what it meant to be alive between 1881 and 1942" in central Europe; the book has attracted both critical praise and hostile dismissal.

Beware of Pity was adapted into a 1946 film with the same title, directed by Maurice Elvey.

Zweig was a passionate collector of manuscripts. There are important Zweig collections at the British Library, at the State University of New York at Fredonia and at the National Library of Israel. The British Library's Stefan Zweig Collection was donated to the library by his heirs in May 1986. It specialises in autograph music manuscripts, including works by Bach, Haydn, Wagner, and Mahler. It has been described as "one of the world's greatest collections of autograph manuscripts". One particularly precious item is Mozart's "Verzeichnüß aller meiner Werke" – that is, the composer's own handwritten thematic catalogue of his works.

The 1993–1994 academic year at the College of Europe was named in his honour.

Artist Jeff Gabel created an English-language adaptation of Vierundzwanzig Stunden aus dem Leben einer Frau in a large-scale comic book format in 2004, titled 24 Hours in the Life of a Woman.

An adaptation by Stephen Wyatt of Beware of Pity was broadcast by BBC Radio 4 in 2011.

The 2013 Swiss film Mary Queen of Scots directed by Thomas Imbach is based on Zweig's Maria Stuart.

The end-credits for Wes Anderson's 2014 film The Grand Budapest Hotel say that the film was inspired in part by Zweig's novels. Anderson said that he had "stolen" from Zweig's novels Beware of Pity and The Post-Office Girl in writing the film, and it features actors Tom Wilkinson as The Author, a character based loosely on Zweig, and Jude Law as his younger, idealised self seen in flashbacks. Anderson also said that the film's protagonist, the concierge Gustave H., played by Ralph Fiennes, was based on Zweig. In the film's opening sequence, a teenaged girl visits a shrine for The Author, which includes a bust of him wearing Zweig-like spectacles and celebrated as his country's "National Treasure".

The 2016 Austrian-German Film Vor der Morgenröte (Stefan Zweig: Farewell to Europe) chronicles Stefan Zweig's travels in the North and South Americas, trying to come to terms with his exile from home.

The 2018 American short film Crepúsculo by Clemy Clarke is based on Zweig's short story "A Story Told in Twilight" and relocated to a quinceañera in 1980s New York.