Thompson was born in Sheffield, Alabama, on August 19, 1942, the son of Ruth Inez (née Bradley) and Fletcher Session Thompson (born Lauderdale County, Alabama, August 26, 1919, died Lawrenceburg, Tennessee, May 27, 1990), who was an automobile salesman. Thompson had English and distant Dutch ancestry. He attended public school in Lawrenceburg, graduating from Lawrence County High School, where he played high-school football. Thereafter, he worked days in the local post office, and nights at the Murray bicycle assembly plant.

In September 1959, at the age of 17, Thompson married Sarah Elizabeth Lindsey. Their son, Freddie Dalton "Tony" Thompson Jr., was born in April 1960. Son Daniel and daughter Ruth Elizabeth were born soon thereafter. While Thompson was attending law school, both his wife and he worked to pay for his education and support their three children.

Thompson then entered Florence State College (now the University of North Alabama), becoming the first member of his family to attend college. He later transferred to Memphis State University, now the University of Memphis, where he earned a double degree in philosophy and political science in 1964, as well as scholarships to both Tulane and Vanderbilt law schools. He went on to earn his Juris Doctor degree from the Vanderbilt Law School in 1967.

Thompson was admitted to the state bar of Tennessee in 1967. At that time, he shortened his first name from Freddie to Fred. He worked as an assistant U.S. attorney from 1969 to 1972, successfully prosecuting bank robberies and other cases. Thompson was the campaign manager for Republican U.S. Senator Howard Baker's re-election campaign in 1972, and was minority counsel to the Senate Watergate Committee in its investigation of the Watergate scandal (1973–1974).

A Republican staff member, Donald Sanders, found out about the White House tapes and informed the committee on July 13, 1973. Thompson was informed of the existence of the tapes, and he, in turn, informed Nixon's attorney, J. Fred Buzhardt. "Even though I had no authority to act for the committee, I decided to call Fred Buzhardt at home," Thompson later wrote, "I wanted to be sure that the White House was fully aware of what was to be disclosed so that it could take appropriate action."

Journalist Scott Armstrong, a Democratic investigator for the Senate Watergate Committee, is critical of Thompson for having disclosed the committee's knowledge of the tapes to Buzhardt during an ongoing investigation, and says Thompson was "a mole for the White House" and that Thompson's actions gave the White House a chance to destroy the tapes. Thompson's 1975 book At That Point in Time, in turn, accused Armstrong of having been too close to The Washington Post's Bob Woodward and of leaking committee information to him. In response to renewed interest in this matter, in 2007 during his presidential campaign, Thompson said, "I'm glad all of this has finally caused someone to read my Watergate book, even though it's taken them over 30 years."

In 1977, Thompson represented Marie Ragghianti, a former Tennessee Parole Board chair, who had been fired for refusing to release felons after they had bribed aides to Democratic Governor Ray Blanton to obtain clemency. With Thompson's assistance, Ragghianti filed a wrongful termination suit against Blanton's office. During the trial, Thompson helped expose the cash-for-clemency scheme that eventually led to Blanton's removal from office. In July 1978, a jury awarded Ragghianti $38,000 ($139,165.09 in 2016 inflation rate) in back pay and ordered her reinstatement.

In the 1980s, Thompson worked as an attorney, with law offices in Nashville and Washington, DC, handling personal injury claims and defending people accused of white collar crimes. He also accepted appointments as special counsel to the Senate Foreign Relations Committee (1980–1981), special counsel to the Senate Intelligence Committee (1982), and member of the Appellate Court Nominating Commission for the State of Tennessee (1985–1987).

Thompson earned about $1 million in total from his lobbying efforts. Except for the year 1981, his lobbying never amounted to more than one-third of his income. According to the Memphis Commercial Appeal:

Marie Ragghianti's case became the subject of a book, Marie, written by Peter Maas and published in 1983. The film rights were purchased by Director Roger Donaldson, who, after traveling to Nashville to speak with the people involved with the original case, asked Thompson if he wanted to play himself. The resulting film, Marie, was Thompson's first acting role and was released in 1985. Roger Donaldson then cast Thompson in the part of CIA Director in the 1987 film No Way Out. In 1990, he was cast as Ed Trudeau, the head of Dulles Airport, in the action sequel Die Hard 2, as Rear Admiral Painter in The Hunt for Red October, and as Big John, the President of NASCAR, in the movie Days of Thunder (patterned on Big Bill France). Thompson went on to appear in many films and television shows. A 1994 New York Times profile wrote, "When Hollywood Directors need someone who can personify governmental power, they often turn to [Thompson]." He portrayed a fictional President of the United States in Last Best Chance, as well as two historical presidents: Ulysses S. Grant in Bury My Heart at Wounded Knee (2007) and the voice of Andrew Jackson in Rachel and Andrew Jackson: A Love Story (both produced for TV).

Billing records show that Thompson was paid for about 20 hours of work in 1991 and 1992 on behalf of the National Family Planning and Reproductive Health Association, a family planning group trying to ease a George H. W. Bush administration regulation on abortion counseling in federally funded clinics.

In 1994, Thompson was elected to finish the remaining two years of Al Gore's unexpired U.S. Senate term. During the 1994 campaign, Thompson's opponent was longtime Nashville Congressman Jim Cooper. Thompson campaigned in a red pickup truck, and Cooper charged Thompson "is a lobbyist and actor who talks about lower taxes, talks about change, while he drives a rented stage prop." In a good year for Republican candidates, Thompson defeated Cooper in a landslide, overcoming Cooper's early 20% lead in the polls to defeat him by an even greater margin. On the same night Thompson was elected to fill Gore's unexpired term, political newcomer Bill Frist, a Nashville heart surgeon, defeated three-term incumbent Democrat Jim Sasser, the chairman of the Senate Budget Committee, for Tennessee's other Senate seat, which was up for a full six-year term. The twin victories by Thompson and Frist gave Republicans control of both of Tennessee's Senate seats for the first time since Sasser ousted incumbent Bill Brock in 1976.

Thompson had an 86.1% lifetime (1995–2002) American Conservative Union vote rating, compared to 89.3 for Bill Frist and 82.3 for John McCain. Senator Susan Collins (R-Maine) characterized her colleague this way: "I believe that Fred is a fearless senator. By that I mean he was never afraid to cast a vote or take a stand, regardless of the political consequences." Thompson was "on the short end of a couple of 99–1 votes", voting against those who wanted to federalize matters that he believed were properly left to state and local officials.

Thompson's work included investigation of the "Umm Hajul controversy" which involved the death of Tennessean Lance Fielder during the Gulf War. During his term, he supported campaign Finance reform, opposed proliferation of weapons of mass destruction, and promoted government efficiency and accountability. During the 1996 presidential debates, he also served as a Clinton stand-in to help prepare Bob Dole.

Thompson became committee chairman in 1997, but was reduced to ranking minority member when the Democrats took control of the Senate in 2001. Thompson served on the Finance Committee (dealing with health care, trade, Social Security, and taxation), the Intelligence Committee, and the National Security Working Group.

On February 12, 1999, the Senate voted on the Clinton impeachment. The perjury charge was defeated with 45 votes for conviction, and 55, including Thompson, against. The obstruction of justice charge was defeated with 50, including Thompson, for conviction, and 50 against. Conviction on impeachment charges requires the affirmative votes of 67 senators.

In the 2000 Republican presidential primaries, Thompson backed former Tennessee Governor Lamar Alexander, who eventually succeeded Thompson in the Senate two years later. When Alexander dropped out, Thompson endorsed Senator John McCain's bid and became his national co-chairman. After George W. Bush won the primaries, both McCain and Thompson were considered as potential running mates.

Thompson was not a candidate for re-election in 2002. He had publicly stated his unwillingness to have the Senate become a long-term career. Although he announced in the wake of the September 11, 2001 attacks his intention to seek re-election ("Now is not the time for me to leave," said Thompson at the time), upon further reflection, he decided against it. The decision seems to have been prompted in large part by the death of his daughter.

In July 1996, Thompson began dating Jeri Kehn (born 1966) and the two married almost six years later on June 29, 2002. When Thompson was asked in a December 2007 Associated Press survey of the candidates to name his favorite possession, he replied, tongue-in-cheek, "trophy wife". The couple have two children, a daughter Hayden born in 2003 and a son Samuel born in 2006.

Thompson said that U.S. borders should be secured before considering comprehensive immigration reform, but he also supported a path to citizenship for illegal aliens saying, "You're going to have to, in some way, work out a deal where they can have some aspirations of citizenship, but not make it so easy that it's unfair to the people waiting in line and abiding by the law." Thompson supported the U.S. 2003 invasion of Iraq and was opposed to withdrawing troops, but believed that "mistakes have been made" since the invasion.

Thompson was diagnosed with non-Hodgkin's lymphoma (NHL), a form of cancer, in 2004. In 2007, Thompson stated, "I have had no illness from it, or even any symptoms. My life expectancy should not be affected. I am in remission, and it is very treatable with drugs if treatment is needed in the future—and with no debilitating side effects." Reportedly indolent, Thompson's NHL was the lowest of three grades of NHL, and was the rare nodal marginal zone lymphoma. It accounts for only 1–3% of all cases.

After the retirement of Supreme Court Associate Justice Sandra Day O'Connor in 2005, President George W. Bush appointed Thompson to an informal position to help guide the nomination of John Roberts through the United States Senate confirmation process. Roberts was subsequently confirmed as Chief Justice.

In 2006, he served on the advisory board of the legal defense fund for I. Lewis "Scooter" Libby Jr., who was indicted and later convicted of lying to federal investigators during their investigation of the Plame affair. Thompson, who had never met Libby before volunteering for the advisory board, said he was convinced Libby was innocent. The Scooter Libby Legal Defense Fund Trust set out to raise more than $5 million to help Finance the legal defense of Vice President Dick Cheney's former chief of staff. Thompson hosted a fundraiser for the Libby defense fund at his home in McLean, Virginia. After Bush commuted Libby's sentence, Thompson released a statement: "I am very happy for Scooter Libby. I know that this is a great relief to him, his wife and children. This will allow a good American, who has done a lot for his country, to resume his life."

In nationwide polling toward the end of 2007, Thompson's support in the Republican primary election was sliding, with Thompson placing either third or fourth in polls.

He spoke at the 2008 Republican National Convention on September 2 in Minnesota, where he described in graphic detail presumptive Republican nominee John McCain's torture at the hands of the North Vietnamese during his imprisonment, and gave an endorsement of McCain for President.

On March 2, 2009, he took over on Westwood One's East Coast noon time slot, hosting the talk radio program The Fred Thompson Show, after Bill O'Reilly ended The Radio Factor. It was co-hosted for a time by his wife, Jeri. Thompson's final show for Westwood One was aired on January 21, 2011. Douglas Urbanski took Thompson's place in the Westwood One syndication lineup.

In May 2010, Thompson became an advertising spokesman for American Advisors Group, a reverse mortgage lender.

Thompson lobbied Congress on behalf of the Tennessee Savings and Loan League to pass the Garn–St. Germain Depository Institutions Act of 1982, which deregulated the savings and loan industry. A large congressional majority and President Ronald Reagan supported the act, but it was said to be a factor that led to the savings and loan crisis. Thompson received $1,600 for communicating with some congressional staffers on this issue.

In 2014, Thompson appeared in a film, Persecuted, on religious freedom, government surveillance, and censorship.

On the morning of November 1, 2015, Thompson died at the age of 73 from a recurrence of lymphoma. His funeral was held on November 6, 2015, in Nashville, Tennessee, with U.S. Senators John McCain and Lamar Alexander in attendance. He was interred at Mimosa Cemetery in Lawrenceburg, Tennessee, that same day.