Density functional theory (DFT) has met great success in solid state physics, quantum chemistry and in computational material sciences. In this work we show that DFT could shed light on phase transitions and entanglement at finite temperatures. Specifically, we show that the equilibrium state of an interacting quantum many-body system which is in thermal equilibrium with a heat bath at a fixed temperature is a universal functional of the first derivatives of the free energy with respect to temperature and other control parameters respectively. This insight from DFT enables us to express the average value of any physical observable and any entanglement measure as a universal functional of the first derivatives of the free energy with respect to temperature and other control parameters. Since phase transitions are marked by the nonanalytic behavior of free energy with respect to control parameters, the physical quantities and entanglement measures may present nonanalytic behavior at critical point inherited from their dependence on the first derivative of free energy. We use two solvable models to demonstrate these ideas. These results give new insights for phase transitions and provide new profound connections between entanglement and phase transitions in interacting quantum many-body physics.