After teaching civil law at Uppsala University (1891–95), Hammarskjöld worked in the Ministry of Justice and acted as head of that ministry in 1901–02. He was appointed president of the Göta Supreme Court in 1902 and became a member of the Permanent Court of Arbitration at The Hague in 1904, where he served until 1946. In 1905 he acted as minister of education and as a delegate to the negotiations in Karlstad over the dissolution of the union of Sweden and Norway. After acting as Swedish minister in Copenhagen (1905–07), he became governor of Uppsala province, a position he held until 1930.

Hammarskjöld attained prominence in international diplomacy in the years before World War I, serving as Sweden's chief delegate to the Hague Peace Conference (1907) and presiding over the Franco-Italian arbitration court (1913) dealing with seizure of vessels during the Italo-Turkish War (1911–12). He became prime minister in 1914 after the Liberal ministry had resigned in protest over the proposed comprehensive national defense plan that Hammarskjöld soon implemented. He kept Sweden out of World War I, but protests over food shortages forced him to resign in 1917. He subsequently served as curator of the Académie de Droit International (Academy of International Law) at The Hague, president of the Institut de Droit International (1924–38), and chairman of the Nobel Prize foundation (1929–47).