The inappropriate use of dispersive clay in constructing roads/highways, embankments, and other structures causes significant challenges to the construction industry. The dispersive clay treatment in this work was carried out for the first time using eco-friendly and sustainable potassium-based material rather than calcium-based, which makes it particularly innovative. This study investigated the impact of potassium-rich wood ash (KRWA) on dispersion, index, unconfined compression strength (UCS), consolidation, physio-chemical, mineralogical and microstructure properties. KRWA amount varied up to 35% and cured for up to 60 days at about 20 to 25 °C. The results revealed that 10% KRWA is the optimum content, decreasing the dispersion and sodium percentage by 82% and 57%, respectively, with 28 days of curing and changing the soil class to non-dispersive. A 56% reduction in plasticity was observed with optimum content, which caused the soil to become more friable, enhancing the treated clay's workability. Moreover, a 575% raise in UCS and a 60% reduction in compressibility were witnessed, which indicates improved load-bearing capacity and the capability of the stabilized clay to bear external loads better. The physio-chemical study revealed that the ion exchange, agglomeration, and flocculation take place immediately with minor/no curing that decreased the repulsion and diffuse double layer thickness, followed by the initiation of the pozzolanic activity, which formed different cementitious gels. X-ray diffraction and scanning electron microscopy experiments confirmed the formation of gels and produced a considerably thicker microstructure. Moreover, cost-based analysis shows that KRWA is more economical than conventional additives for highway/road applications.