Friedrich Wilhelm Plumpe was born in Bielefeld, Province of Westphalia. By the age of seven, he was living in Kassel, northern Hesse. He had two brothers, Bernhard and Robert, and two stepsisters, Ida and Anna. His mother, Otilie Volbracht, was the second wife of his father, Heinrich Plumpe (1847-1914), an owner of a cloth factory in the North West part of Germany. Their villa was often turned into a stage for little plays, directed by the young Friedrich, who had already read books by Schopenhauer, Nietzsche, Shakespeare and Ibsen plays by the age of 12. Plumpe would take the pseudonym of "Murnau" from the town of that name near Lake Staffel, south of Munich, where he once lived for a period of time. At 6 ft 11 in (2.11 m) tall, the young Murnau was said to have an icy, imperious disposition and an obsession with film.

After World War I ended, Murnau returned to Germany where he soon established his own film studio with actor Conrad Veidt. His first feature-length film, The Boy in Blue, a drama inspired by the famous Thomas Gainsborough painting, was released in 1919. He explored the popular theme of dual personalities, much like Robert Louis Stevenson's Dr. Jekyll and Mr. Hyde, in 1920's Der Janus-Kopf starring Veidt and featuring Bela Lugosi.

Murnau's most famous film is Nosferatu, a 1922 adaptation of Bram Stoker's Dracula, starring German stage actor Max Schreck as the vampire Count Orlok. The release would be the only one by Prana Film because the company declared itself bankrupt in order to avoid paying damages to Stoker's estate (acting for the author's widow, Florence Stoker) after it won a copyright infringement lawsuit. Apart from damages, the court ordered also all existing prints of Nosferatu to be destroyed. However, one copy of the film had already been distributed globally. This print, which has been duplicated time and again by a cult following over the years, has made it an early Example of a cult film.

Also in Murnau's filmography was The Last Laugh ("Der Letzte Mann", German "The Last Man") (1924), written by Carl Mayer (a very prominent figure of the Kammerspielfilm movement) and starring Emil Jannings. The film introduced the subjective point of view camera, where the camera "sees" from the eyes of a character and uses visual style to convey a character's psychological state. It also anticipated the cinéma vérité movement in its subject matter. The film also used the "unchained camera technique", a mix of tracking shots, pans, tilts, and dolly moves. Also, unlike the majority of Murnau's other works, The Last Laugh is considered a Kammerspielfilm with Expressionist elements. Unlike expressionist films, Kammerspielfilme are categorized by their chamber play influence, involving a lack of intricate set designs and story lines / themes regarding social injustice towards the working classes. Murnau was gay.

Murnau emigrated to Hollywood in 1926, where he joined the Fox Studio and made Sunrise: A Song of Two Humans (1927), a movie often cited by scholars as one of the greatest of all time. Released in the Fox Movietone sound-on-film system (music and sound effects only), Sunrise was not a financial success, but received several Oscars at the very first Academy Awards ceremony in 1929. In winning the Academy Award for Unique and Artistic Production it shared what is now the Best Picture award with the movie Wings. In spite of this, Murnau was financially well off, and purchased a farm in Oregon.

Murnau's next two films, the (now lost) 4 Devils (1928) and City Girl (1930), were modified to adapt to the new era of sound film and were not well received. Their poor receptions disillusioned Murnau, and he quit Fox to journey for a while in the South Pacific.

Together with documentary film pioneer Robert J. Flaherty, Murnau traveled to Bora Bora to make the film Tabu in 1931. Flaherty left after artistic disputes with Murnau who had to finish the movie on his own. The movie was censored in the United States for images of bare-breasted Polynesian women. The film was originally shot by Cinematographer Floyd Crosby as half-talkie, half-silent, before being fully restored as a silent film — Murnau's preferred medium.

American author Jim Shepard based his 1998 novel Nosferatu on Murnau's life and films. The book began as a short story from Shepard's 1996 collection Batting Against Castro.

In 2000, Director E. Elias Merhige released Shadow of the Vampire, a fictionalization of the making of Nosferatu. Murnau is portrayed by John Malkovich. In the film, Murnau is so dedicated to making the film genuine that he actually hires a real vampire (Willem Dafoe) to play Count Orlok.

In the fifth season of American Horror Story, subtitled Hotel (2015), Murnau is a mentioned character who, sometime in the early 1920s, travels to the Carpathian Mountains while doing research for the film Nosferatu. There, he discovers a community of vampires, and becomes one himself. After returning to the United States, Murnau turns actor Rudolph Valentino and Natacha Rambova into vampires to preserve their beauty. Valentino later transforms his fictional lover, Elizabeth Johnson, into a vampire, and she goes on to become The Countess, the central antagonist of the season.