This is really confusing to me. Buddha himself was an ascetic, and his teachings seem to imply that the path to nirvana is attained through renouncing one's worldly possessions.
Isn't this in direct contradiction to the Middle Way?
These are common misunderstandings of the middle way. The middle way is best explained through the Buddha's life story.
The Buddha began as a nobleman who had the money for all the indulgence in sensual pleasures which he wanted. However, indulgence in pleasure did not lead to lasting happiness. This is the first extreme. The Buddha then became an ascetic who starved himself and took part in self mortification. This was an attempt at gaining happiness through pain, or indulgence in pain. This is the second extreme and it did not lead to lasting happiness.
The middle way is neither indulgence in pleasure nor indulgence in pain. The middle way is not about moderation, it is about the attitude to indulgence.
Taking a simple example like eating chocolate: There are extremes of never eating chocolate or eating 10 bars of chocolate each day, but eating in moderation such as 1 bar per day is not going to bring about happiness. If you eat 1 bar of chocolate and you treat it as the best thing you've ever tasted then you're already indulging in pleasure. The amount of chocolate is irrelevant. The point is to eat chocolate without doing it to seek pleasure and without doing it to seek pain.
One final common misconception which you didn't mention is "The middle way is for laypeople, monks don't follow the middle way". This misconception comes from the idea that the middle way is moderation. Although monks deny themselves things like sex or perfume this is not a type of indulgence in pain, the purpose of the rules is entirely different. The monks don't try to use perfume in moderation but as I've explained moderation is not the middle way.
This is not true, The Buddha did not say that one only achieves nirvana (the highest happiness) after renouncing the world.
Arahantship or enlightenment is caused by the ending of mental fermentations, defilements, pains, hankers, cankers (asavas), not from merely giving up worldly possessions (this is something repeated throughout the Pali canons).
There were lots of people during The Buddha's time who gave up worldly possessions but did not achieve arahantship.
When Siddartha Gautama did severe austerities (like starving) he found that it had no benefits and just made him weak. When he started eating again after regaining his strength he found it easier to concentrate, but his enlightenment came only after the ending of mental fermentations (asavas).
The Buddha discovered the "Middle way" in between the extremes of austerities and the extremes of a worldly life.
The rules for monks are there to help one achieve arahantship in this lifetime, but arahantship won't come until the ending of mental fermentations, defilements, pains, cankers, taints, hankers (asavas).
When you go too much into the extremes of austerities it becomes difficult to end mental fermentations and when you go too much into the extremes of a worldly life it becomes difficult to end mental fermentations. So it's the "Middle way".
In the Cula-dhammasamadana Sutta (MN 45) The Buddha describes:
So it's important to emphasize the ending of mental fermentations (asavas) above everything else as The Buddha himself said that ascetics who torment and afflict the body even while following many of the same rules that Buddhist monks follow lead a life that yields pain in the future (to lower destinations like hell).
“Master Gotama, are there any Ājīvaka ascetics who make an end of suffering when the body breaks up?” “No, Vaccha.”
“But are there any Ājīvaka ascetics who go to heaven when the body breaks up?”
“Vaccha, when I recollect the past ninety-one eons, I can’t find any Ājīvaka ascetics who have gone to heaven, except one; and he taught the efficacy of deeds and action.” (MN 71)
The 'Middle-Way' does not require giving up all worldly possessions. Instead, the Middle-Way states to not engage in sensual pleasures.
A person can have basic worldly possessions ('requisites'), such as food, housing, clothing, medicine, etc, and still practise the Middle-Way.
In short, practising the Middle-Way does not require being a monk or nun.
The 'Middle-Way' was described in the 1st Sermon as the way of life that does not rely on impermanent & unsatisfying sensual pleasures for happiness nor subjects oneself to & attempts to become impervious to pain.
The Middle-Way culminates in the four blissful meditations (jhana) and ultimately Nirvana, which is permanent peace & freedom. The happiness of the Middle Way is far superior to the happiness of sensual & worldly pleasures. Therefore, there is no contradiction.
People are attached to sensual pleasures, which generates suffering when those sensual pleasures cease &/or are lost. Sensual pleasures also create enslaving tormenting addictions. Further, sensual pleasures cannot bring true permanent happiness, which is why people get bored of sensual pleasures and continually search for & acquire new sensual pleasures.
Therefore, from a Buddhist perspective, reliance on sensual pleasures cannot be bring lasting true permanent happiness. The scriptures state:
The Blessed One has said that sensual pleasures are of little satisfaction, much stress, much despair & greater drawbacks. The Blessed One has compared sensual pleasures to a chain of bones...to a lump of flesh... a grass torch... a pit of glowing embers... a dream... borrowed goods... the fruits of a tree... a butcher's ax and chopping block... swords and spears... a snake's head: of much stress, much despair & greater drawbacks."
~~~
And what may be said to be subject to aging... illness... death... sorrow... defilement? Spouses & children... men & women slaves... goats & sheep... fowl & pigs... elephants, cattle, horses, & mares... gold & silver are subject to aging... illness... death... sorrow... defilement. Subject to aging... illness... death... sorrow... defilement are these acquisitions, and one who is tied to them, infatuated with them, who has totally fallen for them, being subject to birth, seeks what is likewise subject to aging... illness... death... sorrow... defilement
What is the moderate amount of cigarettes to smoke? None.
Moderation in the pursuit of truth is a vice.
Moderation does not mean indulgence.
When the Buddha refers to the Middle Way he wasn't talking about 'moderation' of indulging in desire, he was talking about avoiding the pitfall of extremes. To the Buddha any level of 'moderation' of indulgence in desire is not the Middle Way.
The Buddha calls this path the middle way (majjhima patipada). It is the middle way because it steers clear of two extremes, two misguided attempts to gain release from suffering. One is the extreme of indulgence in sense pleasures, the attempt to extinguish dissatisfaction by gratifying desire. This approach gives pleasure, but the enjoyment won is gross, transitory, and devoid of deep contentment. The Buddha recognized that sensual desire can exercise a tight grip over the minds of human beings, and he was keenly aware of how ardently attached people become to the pleasures of the senses. But he also knew that this pleasure is far inferior to the happiness that arises from renunciation, and therefore he repeatedly taught that the way to the Ultimate eventually requires the relinquishment of sensual desire. Thus the Buddha describes the indulgence in sense pleasures as "low, common, worldly, ignoble, not leading to the goal."
The other extreme is the practice of self-mortification, the attempt to gain liberation by afflicting the body. This approach may stem from a genuine aspiration for deliverance, but it works within the compass of a wrong assumption that renders the energy expended barren of results. The error is taking the body to be the cause of bondage, when the real source of trouble lies in the mind — the mind obsessed by greed, aversion, and delusion. To rid the mind of these defilements the affliction of the body is not only useless but self-defeating, for it is the impairment of a necessary instrument. Thus the Buddha describes this second extreme as "painful, ignoble, not leading to the goal."
Aloof from these two extreme approaches is the Noble Eightfold Path, called the middle way, not in the sense that it effects a compromise between the extremes, but in the sense that it transcends them both by avoiding the errors that each involves. The path avoids the extreme of sense indulgence by its recognition of the futility of desire and its stress on renunciation. Desire and sensuality, far from being means to happiness, are springs of suffering to be abandoned as the requisite of deliverance. But the practice of renunciation does not entail the tormenting of the body. It consists in mental training, and for this the body must be fit, a sturdy support for the inward work. Thus the body is to be looked after well, kept in good health, while the mental faculties are trained to generate the liberating wisdom. That is the middle way, the Noble Eightfold Path, which "gives rise to vision, gives rise to knowledge, and leads to peace, to direct knowledge, to enlightenment, to Nibbana."
Anything short of the Noble Eightfold Path is actually indulgence in sensual pleasure, no matter how 'moderate'.
"Bhikkhus, these two extremes ought not to be cultivated by one gone forth from the house-life. What are the two? There is devotion to indulgence of pleasure in the objects of sensual desire, which is inferior, low, vulgar, ignoble, and leads to no good; and there is devotion to self-torment, which is painful, ignoble and leads to no good.
"The middle way discovered by a Perfect One avoids both these extremes; it gives vision, it gives knowledge, and it leads to peace, to direct acquaintance, to discovery, to nibbana. And what is that middle way? It is simply the noble eightfold path, that is to say, right view, right intention; right speech, right action, right livelihood; right effort, right mindfulness, right concentration. That is the middle way discovered by a Perfect One, which gives vision, which gives knowledge, and which leads to peace, to direct acquaintance, to discovery, to nibbana.
Dhammacakkappavattana Sutta: Setting Rolling the Wheel of Truth
There is a good discussion of the Middle Way in this answer.
The Middle Way is not a moderation between the goal of ending suffering and the goal of enjoying material pleasures.
There is only one goal in Buddhism, which is attaining permanent happiness through ending suffering. There is no other goal.
To achieve this goal, the Middle Way of practice is prescribed by the Buddha, in between extreme ascetism and extreme indulgence, and is shown in the Noble Eightfold Path.
The monastic order (which requires renouncing worldly possessions) is just a more intensive training program to achieve the goal of ending suffering. It is designed for faster progress in achieving the goal. However, it is not mandatory. Both lay people and monks can progress in their path, following the Noble Eightfold Path.
The Buddha did not shun the worldly or lay life. For example, you can see how Buddha provided advice on financial management and economics in this answer, this answer and this answer.
In the Sigalovada Sutta, the Buddha taught:
By dividing wealth into four parts, True friendships are bound; One part should be enjoyed; Two parts invested in business; And the fourth set aside Against future misfortunes.
The same sutta has plenty more advice for the lay life.
In the Maha-vacchagottasutta, the Buddha tells that there have indeed been lay male and female followers of his who had become enlightened. So, that's not impossible.
Also see this answer.
It's impossible to realize path and fruits, the Dhamma, while holding on home and house. To understrand what it means, even that requires one to leave home: Where and what to practice
Only in the homeless state the Noble Eightfold path can be practiced, see especially right resolve.
"And what is right resolve? Being resolved on renunciation, on freedom from ill-will, on harmlessness: This is called right resolve."
One is wasting his time practicing holding on his house and outward possessions.
Some words for those able to leave home: Out, border and contact with the Noble ones domain
Less are able, are you? You aren't, not knowing letting go.
[Note: This gift is not for householding, trade, exchange, stackes... and if not given to give release here, it should possible be deleted]
'you can attain nirvana only after renouncing worldly possessions?'
no - I meditated to satori 40 years ago - I forget exactly how long it took but maybe about two and a half months - which I only recently read was apparently about the same time as Gautama took.
I live in a house full of junk - have retired with enough money and regularly enjoy overseas travel - but with an empty no-mind free to see with crystal clarity the beauty of the world, I tend to live simply - my partner just told me our carpet has changed colour after 25 years - our 35yo kitchen has not been renovated - it works fine - I drive a 26yo small car - it works perfectly.
So I don't live in the forest under a tree - I live in the centre of city and today enjoyed some wonderful Japanese ice cream treats - but without desire or attachment to things, I could lose the stuff - or my life tomorrow without any worry.
Without Fear - http://users.rider.edu/~suler/zenstory/nofear.html
“I thought: ‘Why am I afraid of that pleasure that has nothing to do with sensual pleasures and unwholesome states?’ I thought: ‘I am not afraid of that pleasure since it has nothing to do with sensual pleasures and unwholesome states.’“I considered: ‘It is not easy to attain that pleasure with a body so excessively emaciated. Suppose I ate some solid food—some boiled rice and porridge.’
suttacentral.net/en/mn36