Paeonia lactiflora is one of the most famous species of herbaceous peonies with gorgeous flowers. Bud dormancy is a crucial developmental process that allows P. lactiflora to survive unfavorable environmental conditions. However, little information is available on the molecular mechanism of the bud dormancy in P. lactiflora. We performed de novo transcriptome sequencing using the Illumina RNA sequencing platform for the underground renewal buds of P. lactiflora 'Hangbaishao' to study the molecular mechanism underlying its bud dormancy transition (the period from endodormancy to ecodormancy) and release (the period from ecodormancy to bud elongation and sprouting). Approximately 300 million high-quality clean reads were generated and assembled into 207,827 (mean length = 828 bp) and 51,481 (mean length = 1250 bp) unigenes using two assembly methods named "Trinity" and "Trinity+PRICE", respectively. Based on the data obtained by the latter method, 32,316 unigenes were annotated by BLAST against various databases. Approximately 1,251 putative transcription factors were obtained, of which the largest number of unique transcripts belonged to the basic helix-loop-helix protein (bHLH) transcription factor family, and five of the top ten highly expressed transcripts were annotated as dehydrin (DHN). A total of 17,705 simple sequence repeat (SSR) motifs distributed in 13,797 sequences were obtained. The budbreak morphology, levels of indole-3-acetic acid (IAA) and abscisic acid (ABA), and activities of guaiacol peroxidase (POD) and catalase (CAT) were observed. The expression of 20 interested unigenes, which annotated as DHN, heat shock protein (HSP), histone, late elongated hypocotyl (LHY), and phytochrome (PHY), and so on, were also analyzed. These studies were based on morphological, physiological, biochemical, and molecular levels and provide comprehensive insight into the mechanism of dormancy transition and release in P. lactiflora. Transcriptome dataset can be highly valuable for future investigation on gene expression networks in P. lactiflora as well as research on dormancy in other non-model perennial horticultural crops of commercial significance.