Lyne was educated at Highgate School in North London; as was his younger brother, Professor Oliver Lyne (1944–2005), who was an academic at Oxford University. Their father was a Teacher at the school.

Lyne was born in Peterborough in Cambridgeshire and raised in London. An avid moviegoer during his school days at Highgate, he was inspired to make his own films by the work of French New Wave Directors like Godard, Truffaut and Chabrol. Lyne was among a generation of British Directors in the 1970s, including Ridley Scott, Alan Parker, Tony Scott and Hugh Hudson, who would begin their career making television commercials before going on to have major success in films. Their techniques in making commercials were admired and copied by major names in the film industry, with Lyne stating: "I remember making this advertisement up in Yorkshire when I got a message that Stanley Kubrick had called. He'd seen an ad I'd made for milk in which I'd used a particular type of graduated filter. He wanted to know exactly which filter I'd used."

Two of Lyne's early short films, The Table and Mr Smith, were official entries in the London Film Festival. In his twenties he played trumpet with the jazz group, The Colin Kellard Band. Lyne made his feature filmmaking debut in 1980 with Foxes, a perceptive look at the friendship of four teenage girls growing up in Los Angeles's San Fernando Valley, starring Jodie Foster. His next film, 1983's Flashdance, is an innovative blend of rock 'n' roll, new dance styles, and visual imagery. Lyne's bravura visuals (reminiscent of his 1970s UK commercials for Brutus Jeans), wedded to Giorgio Moroder's score, propelled the story of an aspiring ballerina (Jennifer Beals, in her film debut) who works in a factory by day and dances in a club at night. The film generated over $200 million worldwide and was the third highest-grossing film of 1983. The film was also nominated for three Academy Awards, with the theme song, "What a Feeling", winning the Oscar for Best Song.

In 1986, Lyne attracted controversy with 9 1/2 Weeks. Based on a novel by Elizabeth McNeill, the tale of a sexually obsessive relationship starred Mickey Rourke and Kim Basinger. Although considered too explicit by its American distributor, and cut for U.S. release, it became a huge hit abroad in its unedited version. Lyne's fourth film was the blockbuster Fatal Attraction, which generated over $320 million worldwide, making it the highest-grossing film of 1987. The story of a happily married Lawyer (Michael Douglas) who tries to break off an affair with an attractive single woman (Glenn Close), only to have her become obsessed with him and endanger his family, the film struck a chord with audiences. Deemed "the zeitgeist hit of the decade" by TIME Magazine, Fatal Attraction earned six Academy Award nominations including Best Picture, Best Director, Best Actress (Glenn Close), Best Supporting Actress (Anne Archer), Best Screenplay and Best Editing.

In 1990, Lyne directed Jacob's Ladder. Written by Academy Award-winner Bruce Joel Rubin (Ghost) and starring Tim Robbins, Elizabeth Peña and Danny Aiello, the film took audiences on a tortuous ride through Vietnam veteran Jacob Singer's (Robbins) nightmarish world of reality and hallucinations to reveal a surprise twist ending. The film won Best Picture at the Avoriaz Film Festival. With Indecent Proposal, Lyne examined how the sexes look at relationships and money. Starring Robert Redford, Woody Harrelson and Demi Moore, Indecent Proposal, became a worldwide box office hit.