The work attempts to investigate the dielectric properties and microwave drying characteristics of Yunnan lignite, so as to upgrade it. The effect of drying temperature, moisture content and microwave heating frequency on dielectric properties was measured using resonant cavity method. Results indicate that both the values of ε′ and ε″ presented two stage at the investigated temperatures. Bulk water was found to be the main factor contributing to an increase in the ε′ and ε″. Microwave drying kinetics of lignite were carried out. The Page model was the best model reflecting the drying kinetics, and the effective diffusion coefficient and active energy at different drying stages were obtained. In addition, the microwave drying mechanism has been proposed based on the study of dielectric and drying properties of lignite. The SEM images indicated that microchannels were formed within the lignite particle by the microwave pumping effect. FT-IR spectra showed that the oxygen-containing functional groups and hydrogen bonds between them were break by microwave drying. Based on the achieved results, the microwave treatment at 150 °C is helpful to upgrade the lignite.