A positive effect of pulp and paper mill sludges as a rich source of organic substrates on soil properties was previously found for some types of sludge and soil. In this study, the effect of secondary pulp and paper sludge on water characteristics and thermal properties of Retisol, as well as the growth parameters of lettuce (Lactuca sativa L.), was tested on the basis of a pot experiment when watering plants with a 20 or 40% sludge solution. The sludge application enhanced plant growth with an increase in biomass accumulation of 21 and 53%, respectively, for 20 and 40% sludge treatments. When the sludge dose was increased from 0 to 40%, the number of leaves increased by 25%, and the leaf mass per area value increased by 42%. Due to the accumulation of more biomass in the shoots than in the roots, sludge causes a change in the allocation of plant biomass. A significant effect of the sludge application on soil particle and microaggregate sized compositions, as well as on the saturated soil hydraulic conductivity, was not found in this study. However, fitted soil water retention curves showed an increased soil water content in sludge-treated soil at all water content values exceeding field capacity. Secondary sludge application led to an increase in the saturated water content from 0.50 to 0.56 cm3 cm−3. The 40% sludge solution increased soil thermal conductivity from 0.92 to 0.98 W m−1 K−1 under saturated water content and from 0.83 to 0.92 W m−1 K−1 under field capacity. The thermal conductivity was higher in the sludge-treated than untreated soil due to a more pronounced positive effect of increased saturated water content than the negative effect of the increased organic matter content on heat transfer. The positive impact of secondary sludge application on both plant growth parameters and physical properties of Retisol, such as increased soil water-holding capacity and thermal conductivity coefficient confirms the possibility of using it to improve soil characteristics and plant productivity.