We investigate a model of two Kondo impurities coupled via an Ising interaction. Exploiting the mapping to a generalized single-impurity Anderson model, we establish that the model has a singlet and a (pseudospin) doublet phase separated by a Kosterlitz-Thouless quantum phase transition. Based on a strong-coupling analysis and renormalization-group arguments, we show that at this transition the conductance G through the system either displays a zero-bias anomaly, G∼|V|^-2(√2-1), or takes a universal value G=(e²/πℏ)cos²(π/2√2), depending on the experimental setup. Close to the Toulouse point of the individual Kondo impurities, the strong-coupling analysis allows us to obtain the location of the phase boundary analytically. For general model parameters, we determine the phase diagram and investigate the thermodynamics using numerical renormalization-group calculations. In the singlet phase close to the quantum phase transition, the entropy is quenched in two steps: first the two Ising-coupled spins form a magnetic minidomain which is, in a second step, screened by a Kondoesque collective resonance in an effective solitonic Fermi sea. In addition, we present a flow-equation analysis which provides a different mapping of the two-impurity model to a generalized single-impurity Anderson model in terms of fully renormalized couplings, which is applicable for the whole range of model parameters.