The invention discloses low molecular weight water-soluble phenolic resin and a preparation method thereof, and relates to water-soluble phenolic resin and a preparation method thereof. The invention solves the problems that the traditional low molecular weight water-soluble phenolic resin has high free formaldehyde, low water dilution and short storage time. The preparation method comprises following steps: 1. melting phenol, heating, adding catalyst and insulating the heat; 2. heating at uniform speed and adding formaldehyde solution; 3. insulating the heat, heating, reducing the heat and insulating the heat again; and 4. reducing the heat to 40DEG C to obtain the low molecular weight water-soluble phenolic resin. The low molecular weight phenolic resin has the free formaldehyde content of lower than 2 percent and the water dilution times of 5 to 8 times of that of common resin, has no stratified precipitation phenomenon after being stored for 4 months and uniform and transparent resin. The preparation method has the advantages of simple process, convenient operation and easy industrialization, and is applicable to heat resistant materials, insulating materials and other fields.