Sebastian was born to a Jewish family in Brăila. After finishing his secondary studies, Sebastian went on to study law in Bucharest, but was soon attracted to the literary life and the exciting ideas of the new generation of Romanian intellectuals, as epitomized by the literary group Criterion which included such luminaries as Emil Cioran, Mircea Eliade and Eugene Ionesco. Sebastian published several novels, including Accidentul ("The Accident") and Oraşul cu salcâmi ("The Acacia Tree City"), heavily influenced by French novelists such as Marcel Proust and Jules Renard.
Although initially an apolitical movement, Criterion came under the increasing influence of Nae Ionescu's own brand of philosophy, called Trăirism, which mixed jingoistic nationalism, existentialism and Christian mysticism, as well as that of the fascist and anti-Semitic paramilitary organization known as the Iron Guard. As a Jew, Sebastian came to be regarded as an outsider within the group, even by his friends.
In 1934 he published another novel, De două mii de ani... ("It's been two thousand years..."), about what it meant to be a Jew in Romania, and asked Nae Ionescu, who at the time was still friendly with Sebastian, to write the preface. Ionescu agreed, generating uproar by inserting paragraphs both antisemitic and against the very nature of the book they introduced. Sebastian "decided to take the only intelligent revenge" and publish the preface, which only heightened the controversy. Sebastian's decision to include the preface prompted criticism from the Jewish community (notable Jewish satirist Ludovic Halevy, for instance, referred to Sebastian as "Ionescu's lap dog"), as well as the far-right circles patronized by Ionescu and the Iron Guard. The anti-semitic daily newspaper Sfarmă Piatră (literally "Breaking Rocks") denounced Sebastian as a "Zionist agent and traitor", despite the fact that Sebastian vocally declared himself to be a proud Romanian with no interest in emigrating from his Romanian homeland.
In response to the criticism, Sebastian wrote Cum am devenit huligan ("How I Became a Hooligan"), an anthology of essays and articles depicting the manner in which De două mii de ani... was received by the Romanian public and the country's cultural establishment. In the book, he answered his critics by holding up a mirror to their prejudice, detailing and assailing the claims of both his right-wing and left-wing detractors. He addresses the rabid antisemitism of the former in a clear and unaffected manner, underlining its absurdity: "I was born in Romania, and I am Jewish. That makes me a Jew, and a Romanian. For me to go around and join conferences demanding that my identity as a Jewish Romanian be taken seriously would be as crazy as the Lime Trees on the island where I was born to form a conference demanding their rights to be Lime Trees. As for anyone who tells me that I'm not a Romanian, the answer is the same: go talk to the trees, and tell them they're not trees." Yet for all the sharpness and clarity of his response, he could not help but feel betrayed and saddened by Ionescu's vicious preface: "What hurt me was not the idea that the preface would be made public - what hurt me was the idea that it had been written. Had I known it would have been destroyed immediately afterwards, it still would have hurt me had it been written..."