He remained in the Reichsmarine for the next 16 years, commanding the Emden. In the fall of 1935, Doenitz was appointed by Generaladmiral Raeder to raise and command the U-boat arm of the navy. On January 1, 1936 he was named the Fuhrer der Unterseeboote (FdU). By the fall of that year, his title was changed to Befehlshaber der Unterseeboote (BdU).

Doenitz admired Adolph Hitler and was a strong supporter of the National Socialist German Workers' (Nazi) Party. In 1942, he received the Knight's Cross and was promoted to admiral. This was quickly followed, in 1943, with a promotion to grand admiral. Doenitz succeeded Admiral Raeder as supreme commander of the German navy. Three months later he received the Oak Leaves of the Knight's Cross and on January 30, 1944 he was awarded the coveted Golden Party Badge for his loyalty to the party.

Doenitz is recognized by military experts for the important role he played during the war. His submarine tactics nearly won the war for Germany. A capable tactician, he directed the Battle of the Atlantic against Allied supply ships. By sinking more than 15 million tons of Allied shipping, his U-boat fleet proved to be one of Germany's most effective weapons. Doenitz developed the concept of the "wolf pack" in submarine warfare by grouping his U-boats to lay in wait for Allied convoys. His coordination of reconnaissance aircraft, re-supply vessels, and wolf packs allowed his U-boats to strike where they would inflict the greatest damage. By 1943, he commanded 212 operative U-boats, and had another 181 in training. His attacks remained successful until the invention of microwave radar, which allowed the Allies to find and wreak havoc on the U-boat wolf packs.

Hitler recognized that submarine warfare was essential to the war effort. Evidence reflects that Hitler and Doenitz consulted continuously, conferring on naval questions 120 times throughout the course of the war. In Hitler's last will, he named Doenitz as his successor. Upon hearing of Hitler's death, Doenitz was appointed Reich president and supreme commander of the armed forces. He set up his government in Flensburg-Murwik on the northern German border with Denmark. For a mere 20 days Doenitz served as the last leader of the Third Reich. On May 23, 1945 he was captured by the British.

Doenitz expressed surprised when he was brought to trial at Nuremberg at the close of World War II, and charged with war crimes. He succeeded in convincing his prosecutors that he had no knowledge of the atrocities directed by Hitler and that, in his role as grand general, he was only following orders. On October 1, 1946, he was found guilty of "planning aggressive war" and sentenced to ten years in Berlin's Spandau prison.

Upon his release in 1956, Doenitz lived in seclusion in the small town of Aumuhle, near Hamburg, Germany. In 1958, he published Memoirs: Ten Years and Twenty Days, maintaining that he had no knowledge of the crimes committed by Hitler. Ten years later, in 1968, he published a second volume of memoirs titled Mein wechselvolles Leben (My Changeful Life). Where he attempted to separate himself from war crimes in the first volume of his memoirs, he attacked the Nuremberg trial process in the second.

Karl Doenitz met and fell in love with Sister Ingeborg Weber, daughter of a German general. She was a fully trained nurse, described as distinctly modern, with a mind of her own. They married on May 27, 1916 and had three children, a daughter Ursula, a son Klaus, and a son Peter. Both sons were killed during the Second World War. Neither Doenitz nor his wife had strong religious convictions, but their children were raised in the Protestant (evangelical) faith.

Doentiz passed away on December 24, 1980 at his home near Hamburg. His funeral was held January 5, 1981 and was attended by thousands of his comrades. Among those attending were a hundred Knight's Cross holders. Attendees were forbidden to wear uniforms because members of the German government felt that Doenitz had been too deeply involved with the activities of the Third Reich.