Altheim was born to an eccentric sculptor of a father in Frankfurt, who passed his Bohemian ways onto his son. But after Franz's mother left, his father committed suicide on Christmas Day 1914. In 1917, Altheim joined the German army, became a translator and was then stationed in the Ottoman Empire.
Altheim began studying classical philology, archaeology and linguistics, paying for his education with a bank job. After making several annual trips to Italy funded by government grants, he became a private lecturer at the University of Frankfurt in 1928. After making friends with Leo Frobenius, a well-known researcher in Germany at the time. Frobenius attended annual events at the home in the Netherlands of former emperor Wilhelm II, where he invited academic elites, and Frobenius asked Altheim to join them.