Pearce was born in New York City, the only child of Margaret Clark and Robert E. Pearce. Her father was a foreign banking specialist, and her family moved to Europe when she was 18 months old. They lived in Brussels, Antwerp, Rome, and Paris. At age nine, she fell off a swing after losing her grip and landed on her chin. This left her with an undeveloped chin. She returned to the United States as a teenager, and boarded at the Masters School in Dobbs Ferry, New York. She graduated from Sarah Lawrence College in 1940, with a degree in drama.

She began working in nightclubs as a Comedian and was cast in the original Broadway production of On the Town (1944–1946). Gene Kelly was so impressed by her that she became the only cast member to be included in the film version in 1949. Her comedic performance was well received by critics and public alike, and she was given her own television variety show, The Alice Pearce Show. More movie roles followed, and she made appearances on Broadway, where she met her husband, Director Paul Davis, during a production of Bells Are Ringing.

Pearce was married twice; in 1948, she married Composer John Rox. In 1957, Rox died of a heart attack. In 1964, she married stage manager Paul Davis, with whom she remained until her death. Pearce had no children.

During the 1953–1954 television season, Pearce was seen regularly on ABC's Jamie, which starred Brandon deWilde. In 1964, Pearce was originally approached to play the part of Grandmama in the ABC television comedy series The Addams Family. She turned down the part, which went to veteran Actress Blossom Rock. In 1964, Pearce joined the cast of Bewitched as the nagging and nosy neighbor Gladys Kravitz. Pearce's scenes were almost entirely reactions to the witchcraft she had witnessed at the house across the street. Her hysterical accusations against Samantha, played by Elizabeth Montgomery, and the disbelief of her husband Abner (George Tobias), provided a Common thread through many of the series' early episodes. She played the role until her death in 1966, and was replaced by Sandra Gould. Pearce was posthumously awarded an Emmy Award for this role; Davis accepted this award on her behalf.