Madigan was born in Chicago, the daughter of John J. Madigan (1918–2012), a well-known Journalist who gave political commentary on shows such as Meet the Press and Face the Nation, and worked for Newsweek. He interviewed a range of political figures, from Richard Nixon to Martin Luther King, Jr., and hosted his own show with WBBM (AM). Her mother was Dolores (née Hanlon; 1921–92), an administrative assistant and amateur Actress who performed in community theatre. She has two brothers, Jack and Jim.

Madigan attended Catholic schools and performed in school plays. In the 1960s, she studied piano at the Chicago Conservatory of Music, and went on to graduate from Marquette University with a degree in philosophy. She moved to Los Angeles in 1974. Madigan later studied acting at the Lee Strasberg Theatre and Film Institute.

In the 1970s, Madigan pursued a career as a musician, singing lead vocals for the band Jelly, whose only album, A True Story (1977), was released by Asylum Records. Madigan appeared in Playboy (June 1978) nude and covered in jelly, to promote her band. She toured across the United States performing for several bands throughout the late 1970s.

In the 1980s, Madigan transitioned from a singing career to acting, and studied at the Lee Strasberg Theatre and Film Institute. Her first television role was as the character Adele on an episode of Hart to Hart in 1981. She followed this guest starring role with a role in the Emmy-nominated television film Crazy Times. The following year, Madigan made her film debut as Terry Jean Moore in Love Child, for which she was nominated for a Golden Globe Award for New Star of the Year – Actress. In 1983, she starred as Alison Ransom in the Emmy-winning television film The Day After.

Madigan has been married to actor Ed Harris since November 21, 1983. They have one daughter, Lily Dolores Harris (born May 3, 1993). Madigan and Harris have been frequent collaborators over the course of their careers.

In 1984, she portrayed McCoy in the cult film Streets of Fire, and also had a supporting role as Viola Kelsey in Places in the Heart, which was nominated for the Academy Award for Best Picture. In 1985, she starred in the television film The Laundromat written by Marsha Norman, opposite Carol Burnett. She won a CableACE Award for her performance as Deedee Johnson. She then co-starred as Glory Scheer, alongside her husband Ed Harris, in Alamo Bay, directed by Louis Malle. Also in 1985, she portrayed Sunny Mackenzie-Sobel in Twice in a Lifetime, for which she was nominated for the Golden Globe Award for Best Supporting Actress – Motion Picture and the Academy Award for Best Supporting Actress.

Madigan made her Off-Broadway debut in 1987, portraying Sue Jack Tiller in The Lucky Spot by Beth Henley, for which she won a Theatre World Award and was nominated for the Drama Desk Award for Outstanding Actress in a Play. In 1988, she was nominated for an Independent Spirit Award for Best Supporting Female for her performance in The Prince of Pennsylvania. That same year, she performed in A Lie of the Mind at the Mark Taper Forum. In 1989, Madigan played the wife of Kevin Costner in Field of Dreams, which was nominated for the Academy Award for Best Picture. That same year, she played Chanice Kobolowski, the girlfriend of John Candy's character, in the John Hughes film Uncle Buck. Also in 1989, she won a Golden Globe Award for Best Supporting Actress – Series, Miniseries or Television Film and was nominated for the Primetime Emmy Award for Outstanding Lead Actress in a Miniseries or a Movie for her performance as Sarah Weddington in the television film Roe vs. Wade.

In 1990, Madigan starred opposite Paula Kelly in Stevie Wants To Play The Blues by Eduardo Machado, for which she won a Drama-Logue Award. In 1991, she starred opposite Olympia Dukakis in the Emmy-nominated television film Lucky Day. Madigan made her Broadway debut in the role of Stella Kowalski in A Streetcar Named Desire in 1992, opposite Jessica Lange and Alec Baldwin. She was nominated for an Outer Critics Circle Award for Outstanding Debut Performance for her role in the play. In 1996, she and Harris produced and starred in the television film Riders of the Purple Sage. Madigan then starred with Tilda Swinton in Female Perversions. In 1997, she was nominated for an Independent Spirit Award for Best Supporting Female for her performance as Brett Armerson in the film Loved. In 2000, she portrayed Peggy Guggenheim in the Oscar-winning film Pollock, which her husband directed, produced, and starred in.

In 2002, she had a supporting role as Reggie Fluty, the officer who first responded to the call for aid for a dying Matthew Shepard, in the Emmy-nominated television film The Laramie Project. In 2005, Madigan starred as Lori Lansky in Winter Passing, directed by Adam Rapp. The following year, she had a supporting role as Patricia Carver, a CIA headquarters analyst, in the Emmy-winning television film The Path to 9/11. In 2007, Madigan played the sister-in-law of Helene (Amy Ryan), Beatrice "Bea" McCready, in the Oscar-nominated film Gone Baby Gone, directed by Ben Affleck. In 2008, she played Dr. Katharine Wyatt on several episodes of ABC's medical drama series Grey's Anatomy. She then guest starred on TNT's crime drama series Saving Grace as Gretchen Lagardi. In 2011, she guest starred in the final episode of TNT's drama series Memphis Beat. In 2016, Madigan starred in the revival of Sam Shepard's play Buried Child for The New Group at the Pershing Square Signature Center. The show transferred to the West End's Trafalgar Studios in November 2016, where Madigan reprised her role as Halie.