Badalamenti was born in Brooklyn, New York to an Italian-American family; his father, who was of Sicilian descent, was a fish market owner. He began taking piano lessons at age eight. By the time Badalamenti was a teenager, his aptitude at the piano earned him a summer job accompanying Singers at resorts in the Catskill Mountains. He received a Bachelor of Arts degree from the Eastman School of Music and then earned Master of Arts degrees in composition, French horn, and piano from the Manhattan School of Music in 1960.

In 1966, Badalamenti co-wrote a song ("Visa to the Stars") on Perrey and Kingsley's album The In Sound from Way Out!. In 1967, using the name "Andy Badale", he co-wrote a song ("Pioneers Of The Stars") for Perrey and Kingsley's next album, Kaleidoscopic Vibrations: Electronic Pop Music From Way Out. He also arranged and produced Perrey's two solo albums for Vanguard Records using the "Andy Badale" pseudonym. In 1987, he lent his services to British synth-pop duo Pet Shop Boys, arranging the orchestration on "It Couldn't Happen Here". Badalamenti also arranged the strings on two tracks on the Pet Shop Boys' Behaviour album in 1990.

Badalamenti scored films such as Gordon's War, and Law and Disorder, but his big break came when he was brought in to be Isabella Rossellini's singing coach for the song "Blue Velvet" in David Lynch's 1986 film Blue Velvet. Inspired by This Mortal Coil's recent cover of Tim Buckley's "Song to the Siren", Lynch had wanted Rossellini to sing her own version, but was unable to secure the rights. In its place, Badalamenti and Lynch collaborated to write "Mysteries of Love", using lyrics Lynch wrote and Badalamenti's music. Lynch asked Badalamenti to appear in the film as the piano player in the club where Rossellini's character performs. This film was the first of many projects they worked on together.

Badalamenti conducted a performance during the opening ceremony of the 1992 Olympics in Barcelona.

In 1993, Badalamenti collaborated with thrash metal band Anthrax on the Twin Peaks-inspired track "Black Lodge" from the Sound of White Noise album. In 1995, he composed, orchestrated and produced Marianne Faithfull's album, titled A Secret Life. In 1996, Badalamenti teamed up with Tim Booth of the British rock band James. As Booth and the Bad Angel, they released an eponymous album on the Mercury label. In 2000, he worked with Orbital on the "Beached" single for the movie The Beach. In 2004, he composed the Evilenko Soundtrack working with Dolores O'Riordan, who sang the main theme and with whom he continued collaborating.

Other Lynch projects he worked on include the movies Wild at Heart, Twin Peaks: Fire Walk with Me, Lost Highway, Mulholland Drive (where he has a small role as a gangster with a finicky taste for espresso), Rabbits, and The Straight Story as well as the television shows On the Air and Hotel Room. Other projects he has worked in include the television film Witch Hunt, and the films Naked in New York, The City of Lost Children, A Very Long Engagement, The Wicker Man, Dark Water and Secretary. He has also worked on the Soundtrack for the video game Fahrenheit (known as Indigo Prophecy in North America). He was Composer for Director Paul Schrader on such films as Auto Focus, The Comfort of Strangers and Dominion: Prequel to the Exorcist. In 1998, Badalamenti recorded "A Foggy Day (in London Town)" with Artist David Bowie for the Red Hot Organization’s compilation album Red Hot + Rhapsody a tribute to George Gershwin which raised money for various charities devoted to increasing AIDS awareness and fighting the disease. In 2005, he composed the themes for the movie Napola (Before the Fall), which were then adapted for the score by Normand Corbeil. In 2008, he directed the Soundtrack of The Edge Of Love, with Siouxsie, Patrick Wolf and Beth Rowley on vocals.

Badalamenti received the Lifetime Achievement Award at the World Soundtrack Awards in 2008. On July 23, 2011, the American Society of Composers, Authors and Publishers presented Badalamenti with the Henry Mancini Award for his accomplishments in film and television music.