At the age of sixteen, Dieterle had joined a traveling theater company as a handy-man, scene shifter, and apprentice actor. His striking good looks and ambition soon paved his way to gain roles as a leading romantic actor in theater productions. In 1919, he attracted the attention of theater director Max Reinhardt in Berlin, who hired him as an actor for his productions until 1924. He started acting in German films in 1921 to make more money and quickly became a popular character actor. He usually portrayed “country yokels” or simpletons with great gusto and popularity, but he was ambitious to begin a career as a director. In 1921 Dieterle married Charlotte Hagenbruch, an actress and later screenwriter.

In 1923 Dieterle used his own money to make his first film, Der Mensch am Wege. Based on the Leo Tolstoy short story Where Love Is, God Is, the film co-starred a young Marlene Dietrich. Years later Dieterle said of the film, “we were just four or five very young, enthusiastic, and revolutionary people who wanted to do something different. We brought it out; it didn’t make any money, but was shown and it was an interesting experiment.” In 1924 Dieterle left Reinhardt’s company and formed his own theater company in Berlin, although it was unsuccessful and short lived. He also returned to film acting for several years and appeared in such notable German films as Das Wachsfigurenkabinett (Waxworks) (1924) and F. W. Murnau’s Faust (1926). In 1927, Dieterle and his wife formed their own production company, Charrha-Film. Dieterle returned to directing films, such as Sex in Chains (1928), in which he also played the lead role.

In 1930, the political and economic situations in Germany worsened. Like many from the German film industry, Dieterle and his wife emigrated to the United States. Dieterle had said, “It was a running joke in Berlin…if the phone rang at a restaurant they said it must be Hollywood. Well, one night my wife and I were dining out and it really happened.” Dieterle was offered a job at First National to make German-language dubbed versions of Hollywood films, as the studios were afraid of losing foreign business with the advent of sound films. But when Dieterle, his wife and a group of actors arrived, they found that the films had already been dubbed. They were chosen as actors in German-language versions of four Hollywood films, including Lloyd Bacon’s Moby Dick (1930), in which Dieterle played Ahab. After the four films were completed, Warner Brothers’ Vice President of Production Hal B. Wallis was so impressed that he invited Dieterle to stay in Hollywood. He became a US citizen in 1937.

Dieterle adapted quickly to Hollywood filmmaking and directed his first film, The Last Flight in 1931. The film depicts four American fighter pilots who roam around Paris after World War I trying to put their lives back together. It starred Richard Barthelmess and Helen Chandler, and the plot was compared to the work of F. Scott Fitzgerald. Although not a success on its first run, it was hailed as a forgotten masterpiece at a 1970 revival screening. Dieterle’s initial Hollywood career was neither successful nor notable. It included such films as the W. C. Fields musical Her Majesty, Love (1932), Jewel Robbery (1932), Adorable (1933), and Fog Over Frisco (1934) with Bette Davis.

In 1934, Max Reinhardt was staging a version of A Midsummer Night’s Dream at the Hollywood Bowl in Los Angeles. Dieterle convinced Warner Brothers to finance a big budget version of the film with an all-star cast. The resulting film, A Midsummer Night’s Dream (1935), revitalized Dieterle’s career and he became a major Hollywood director. Starring James Cagney, Olivia de Havilland, Joe E. Brown and a 15-year-old Mickey Rooney, the film had very mixed reviews for its “Americanization” of Shakespeare, but was a success on release. It is now considered a classic. During production, Reinhardt would rehearse the actors and then let Dieterle direct the film.

He made some films in Germany and Italy, and an American flop, Quick, Let’s Get Married (1964) – also known as The Confession or Seven Different Ways – with Ginger Rogers before retiring in 1965.