He studied at the Universities of Leipzig and Bonn, where at the latter he was a student of Hermann Usener (1834-1905), who in 1899 became Dieterich's father-in-law. In 1888 he earned his doctorate, and three years later received his habilitation in Marburg with a dissertation on Orphism. Afterwards he traveled to Italy and Greece for research purposes.
In 1895 he returned to Marburg as an associate professor, and two years later succeeded Eduard Schwartz (1858-1940) as chair of classical philology at the University of Giessen. In 1903 he was a full professor at the University of Heidelberg.
Much of Dieterich's work involved research of traditional beliefs, mythology and religion of the Greco-Roman world. He was the author of an influential work titled "Abraxas: Studien zur Religionsgeschichte des spätern Altertums", a study based on a magical papyri that was housed at the Leyden Museum. In 1903 he published "Eine Mithrasliturgie", in which he proposes that lines 475 – 834 of the Paris Magical Papyrus contained the official liturgy of the Mithras Cult. His theory was met with skepticism and criticized by several scholars in regards to the Mithraic origin of the liturgy. Other significant works by Dieterich include: