Yoshi's Woolly World is a platform game in which players assumes the role of  Yoshi. Similar to developer Good-Feel's Kirby's Epic Yarn, the game is set in a world where the characters and environment are composed of yarn and cloth. Yoshi retains much of his moveset from the Yoshi's Island series of games, including using his tongue to swallow enemies and using his flutter jump to reach hard areas, and many elements such as flowers and mystery clouds return. However, unlike other games where swallowing enemies would produce eggs which Yoshi could then throw, Yoshi instead produces balls of yarn. These yarn balls have various uses when thrown, such as tying up enemies or filling in certain platforms and objects. Players can also gather white chicks, which produce temporary cloud platforms when thrown. The game also supports up to two players cooperatively, with players able to swallow and throw their partners, allowing them to reach otherwise inaccessible areas. In addition, some sections give Yoshi special transformations, such as a motorbike or umbrella.

Throughout each level, Yoshi can pick up beads which can be spent on Power Badges that can support the player during a level, such as more powerful attacks or the ability to recover from bottomless pits. Each level contains five Flowers, five Wonder Wools, and twenty Stamp Patches, which are hidden behind certain beads. Flowers increase the odds of entering a bonus game at the end of the level, and collecting all Flowers within a world opens up a secret level. Finding all the Yarn Bundles within a level unlocks a new pattern of Yoshi, which players can switch to while on the overworld map. Collecting enough Stamp Patches unlock special stamps that can be used in Miiverse posts. At any point in the game, players can toggle between Classic Mode and Mellow Mode, the latter of which gives Yoshi a pair of wings, allowing less skilled players to fly indefinitely through a stage.

The game features compatibility with Amiibo figures, including a unique knitted Yarn Yoshi Amiibo. Using any Yoshi Amiibo allows players to create a duplicate Yoshi during Solo Play, allowiing solo players to replicate actions otherwise only available in Co-op Play. Additionally, the Yarn Yoshi Amiibo can be used to save a design based on another character. Other compatible figures, such as Mario and Donkey Kong, can be used to unlock additional patterns based on the respective character. The game is playable with the Wii U GamePad, Wii Remote, Wii Classic Controller, and Wii U Pro Controller.