Gaskell was born Elizabeth Cleghorn Stevenson on 29 September 1810 in Lindsey Row, Chelsea, at the house which is now 93 Cheyne Walk. She was the youngest of eight children; only she and her brother John survived infancy. Her father, william Stevenson, a Unitarian from Berwick-upon-Tweed, was minister at Failsworth, Lancashire, but resigned his orders on conscientious grounds; he moved to London in 1806 with the intention of going to India after he was appointed private secretary to the Earl of Lauderdale, who was to become Governor General of India. That position did not materialise, however, and instead Stevenson was nominated Keeper of the Treasury Records.

Her father remarried to Catherine Thomson in 1814. They had a son, william, in 1815, and a daughter, Catherine in 1816. Although Elizabeth spent several years without seeing her father, to whom she was devoted, her older brother John often visited her in Knutsford. John was destined for the Royal Navy from an early age, like his grandfathers and uncles, but he did not obtain preferment into the Service and had to join the Merchant Navy with the East India Company's fleet. John went missing in 1827 during an expedition to India.

A beautiful young woman, Elizabeth was well-groomed, tidily dressed, kind, gentle and considerate of others. Her temperament was calm and collected, joyous and innocent, she revelled in the simplicity of rural life. Much of Elizabeth's childhood was spent in Cheshire, where she lived with her aunt Hannah Lumb in Knutsford, the town she immortalised as Cranford. They lived in a large red-brick house called "Sandlebridge" that overlooked the township of Alderley Edge. From 1821 to 1826 she attended a school run by the Miss Byerleys at Barford House, and after that Avonbank in Stratford-on-Avon, where she received the traditional education in arts, the classics, decorum and propriety given to young ladies at the time. Her aunts gave her the classics to read, and she was encouraged by her father in her studies and writing. Her brother John sent her modern books, and descriptions of his life at sea and his experiences abroad.

On 30 August 1832 Elizabeth married a Unitarian minister, william Gaskell, in Knutsford. They spent their honeymoon in North Wales, staying with her uncle, Samuel Holland, near Porthmadog. The Gaskells then settled in Manchester, where william was the minister at Cross Street Unitarian Chapel. Manchester's industrial surroundings influenced Elizabeth's writing in the industrial genre. Their first child, a daughter, was stillborn in 1833. A son, william, (1844–45), died in infancy, and this tragedy was the catalyst for Gaskell's first novel, Mary Barton. Their other children were Marianne (1834), Margaret Emily, known as Meta (1837), Florence Elizabeth (1842), and Julia Bradford (1846). Marianne and Meta boarded at the private school conducted by Rachel Martineau, sister of Harriet, a close friend of Elizabeth. Florence married Charles Crompton, a barrister and Liberal Politician, in 1863.

In March 1835 Gaskell began a diary documenting the development of her daughter Marianne: she explored parenthood, the values she placed on her role as a mother; her faith, and, later, relations between Marianne and her sister, Meta. In 1836 she co-authored with her husband a cycle of poems, Sketches among the Poor, which was published in Blackwood's Magazine in January 1837. In 1840 william Howitt published Visits to Remarkable Places containing a contribution entitled Clopton Hall by "A Lady", the first work written and published solely by her. In April 1840 Howitt published The Rural Life of England, which included a second work titled Notes on Cheshire Customs.

In July 1841 the Gaskells travelled to Belgium and Germany. German literature came to have a strong influence on her short stories, the first of which she published in 1847 as Libbie Marsh's Three Eras, in Howitt's Journal, under the pseudonym "Cotton Mather Mills". But other influences including Adam Smith's Social Politics enabled a much wider understanding of the cultural milieu in which her works were set. Her second story printed under the pseudonym was The Sexton's Hero. And she made her last use of it in 1848, with the publication of her story Christmas Storms and Sunshine.

Gaskell's first novel, Mary Barton, was published anonymously in 1848. The best-known of her remaining novels are Cranford (1853), North and South (1854), and Wives and Daughters (1865). She became popular for her writing, especially her ghost stories, aided by Charles Dickens, who published her work in his magazine Household Words. Her ghost stories are in the "Gothic" vein, making them quite distinct from her "industrial" fiction.

In early 1850 Gaskell wrote to Charles Dickens asking for advice about assisting a girl named Pasley whom she had visited in prison. Pasley provided her with a model for the title character of Ruth in 1853. Lizzie Leigh was published in March and April 1850, in the first numbers of Dickens's journal Household Words, in which many of her works were to be published, including Cranford and North and South, her novella My Lady Ludlow, and short stories.

Gaskell's style is notable for putting local dialect words into the mouths of middle-class characters and the narrator. In North and South Margaret Hale suggests redding up (tidying) the Bouchers' house and even offers jokingly to teach her mother words such as knobstick (strike-breaker). In 1854 she defended her use of dialect to express otherwise inexpressible concepts in a letter to Walter Savage Landor:

In June 1855 Patrick Brontë asked Gaskell to write a biography of his daughter Charlotte, and The Life of Charlotte Brontë was published in 1857. This played a significant role in developing Gaskell's own literary career. In the biography, Gaskell chose to focus more on Brontë as a woman than as a Writer of Romantic fiction. In 1859 Gaskell travelled to Whitby to gather material for Sylvia's Lovers, which was published in 1863. Her novella Cousin Phyllis was serialised in The Cornhill Magazine from November 1863 to February 1864. The serialisation of her last novel, Wives and Daughters, began in August 1864 in The Cornhill. She died of a heart attack in 1865, while visiting a house she had purchased in Holybourne, Hampshire. Wives and Daughters was published in book form in early 1866, first in the United States and then, ten days later, in Britain.

and later in 'The Manchester Marriage' [1858]:

Sandlebridge would be demolished before 1900, only its chimney remaining.

The house on Plymouth Grove remained in the Gaskell family until 1913, after which it stood empty and fell into disrepair. The University of Manchester acquired it in 1969 and in 2004 it was acquired by the Manchester Historic Buildings Trust, which then raised money to restore it. Exterior renovations were completed in 2011 and the house is now open to the public.

However, the critical tide began to turn in Gaskell's favour when, in the 1950s and 60s, socialist critics like Kathleen Tillotson, Arnold Kettle and Raymond Williams re-evaluated the description of social and industrial problems in her novels (see Moore, 1999 for an elaboration), and—realising that her vision went against the prevailing views of the time—saw it as preparing the way for vocal feminist movements. In the early 21st century, with Gaskell's work "enlisted in contemporary negotiations of nationhood as well as gender and class identities" , North and South – one of the first industrial novels describing conflict between employers and workers – was recognized as depicting complex social conflicts and offering more satisfactory solutions through Margaret Hale: spokesperson for the author and Gaskell's most mature creation.

In her introduction to The Cambridge Companion to Elizabeth Gaskell (2007), a collection of essays representing current Gaskell scholarship, Jill L. Matus stresses the author's growing stature in Victorian literary studies and how her innovative, versatile storytelling addressed the rapid changes during her lifetime.

On 25 September 2010 a memorial to Elizabeth Gaskell was dedicated in Poets' Corner in Westminster Abbey. It takes the form of a panel in the Hubbard memorial window, above the tomb of Geoffrey Chaucer. The panel was dedicated by her great-great-great-granddaughter Sarah Prince and a wreath was laid.