The son of William Julius Derleth and Rose Louise Volk, Derleth grew up in Sauk City, Wisconsin. He was educated in local parochial and public high school. Derleth wrote his first fiction at age 13. He was interested most in reading, and he made three trips to the library a week. He would save his money to buy books (his personal library exceeded 12,000 later on in life). Some of his biggest influences were Ralph Waldo Emerson's essays, Walt Whitman, H. L. Mencken's The American Mercury, Samuel Johnson's The History of Rasselas, Prince of Abissinia, Alexandre Dumas, Edgar Allan Poe, Walter Scott, and Henry David Thoreau's Walden.
Forty rejected stories and three years laterWeird Tales magazine. Derleth wrote throughout his four years at the University of Wisconsin, where he received a B.A. in 1930. During this time he also served briefly as associate editor of Minneapolis-based Fawcett Publications
, according to anthologist Jim Stephens, he sold his first story, "Bat's Belfry", to
Returning to Sauk City in the summer of 1931, Derleth worked in a local canning factory and collaborated with childhood friend Mark Schorer (later Chairman of the University of California, Berkeley English Department). They rented a cabin, writing Gothic and other horror stories and selling them
to Weird Tales magazine. Derleth won a place on the O'Brien Roll of Honor for Five Alone, published in Place of Hawks, but was first found in Pagany magazine.
As a result of his early work on the Sac Prairie Saga, Derleth was awarded the prestigious Guggenheim Fellowship; his sponsors were Helen C. White, Nobel Prize-winning novelist Sinclair Lewis and poet Edgar Lee Masters of Spoon River Anthology fame.
In the mid-1930s, Derleth organized a Ranger's Club for young people, served as clerk and president of the local school board, served as a parole officer, organized a local men's club and a parent-teacher association. He also lectured in American regional literature at the University of Wisconsin and was a contributing editor of Outdoors Magazine.
With longtime friend Donald Wandrei, Derleth in 1939 founded Arkham House. Its initial objective was to publish the works of H. P. Lovecraft, with whom Derleth had corresponded since his teenage years. At the same time, he began teaching a course in American Regional Literature at the University of Wisconsin.
In 1941, he became literary editor of The Capital Times newspaper in Madison, a post he held until his resignation in 1960. His hobbies included fencing, swimming, chess, philately and comic-strips (Derleth reportedly deployed the funding from his Guggenheim Fellowship to bind his comic book collection, most recently valued in the millions of dollars, rather than to travel abroad as the award intended.). Derleth's true avocation, however, was hiking the terrain of his native Wisconsin lands, and observing and recording nature with an expert eye.
Derleth once wrote of his writing methods, "I write very swiftly, from 750,000 to a million words yearly, very little of it pulp material."
In 1948, he was elected president of the Associated Fantasy Publishers at the 6th World Science Fiction Convention in Toronto.
He was married April 6, 1953, to Sandra Evelyn Winters. They divorced six years later. Derleth retained custody of the couple's two children, April Rose and Walden William. April earned a Bachelor of Arts degree in English from the University of Wisconsin-Madison in 1977. She became majority stockholder, President, and CEO of Arkham House in 1994. She remained in that capacity until her death. She was known in the community as a naturalist and humanitarian. April died on March 21, 2011.
In 1960, Derleth began editing and publishing a magazine called Hawk and Whippoorwill, dedicated to poems of man and nature.
Derleth died of a heart attack on July 4, 1971, and is buried in St. Aloysius Cemetery in Sauk City. The U.S. 12 bridge over the Wisconsin River is named in his honor. Derleth was Roman Catholic.