She was born Edith Holm Sondergaard on February 15, 1899 in Litchfield, Minnesota to Danish-American parents, Hans and Christin (Holm) Sondergaard. Her father taught at University of Minnesota, where she was a drama student.

Sondergaard first married in 1922 to actor Neill O'Malley; they divorced in 1930. On May 15, 1930, in Philadelphia, Pennsylvania, she married Herbert Biberman, a theater Director then associated with the Theatre Guild Acting Company; he became a film Director and died in 1971. They had two children, Daniel Hans Biberman and Mrs. Joan Campos.

Sondergaard made her first film appearance in Anthony Adverse (1936) as Faith Paleologue and became the first recipient of the Academy Award for Best Supporting Actress for her performance. Her career as an Actress flourished during the 1930s, including a role with Paul Muni in The Life of Emile Zola (1937).

During pre-production of Metro-Goldwyn-Mayer's classic The Wizard of Oz (1939), an early idea was to have the Wicked Witch of the West portrayed as a slinky, glamorous villainess in a black, sequined costume, inspired by the Evil Queen in Walt Disney's Snow White and the Seven Dwarfs (1937). Sondergaard originally was cast as the witch and was photographed for two wardrobe tests, both of which survive. One was as a glamorous wicked witch, and another as a conventionally ugly wicked witch. After the decision was made to have an ugly wicked witch, Sondergaard, reluctant to wear the disfiguring makeup and fearing it could damage her career, withdrew from the role, and it went to veteran character Actress Margaret Hamilton. Sondergaard was, however, cast as the sultry and slinky Tylette (a magically humanized but devious cat) in The Blue Bird (1940).

Around the same time, she played the role of the exotic, sinister wife in The Letter (also 1940), a film starring Bette Davis. She featured in a supporting role in The Spider Woman (aka Sherlock Holmes and the Spider Woman, 1943), part of the Universal cycle, followed by the non-canonical The Spider Woman Strikes Back (1946), also for Universal.

She received a second Academy Award nomination as Best Supporting Actress for her role as the king's principal wife in Anna and the King of Siam (1946).

Her younger sister Hester Sondergaard was also an Actress who featured in The Naked City (1948) and Jigsaw (1949).

Sondergaard's career suffered irreparable damage during the United States Congressional HUAC Red Scare of the early 1950s when her husband was accused of being a communist and named as one of the Hollywood Ten. (In the 2000 movie One of the Hollywood Ten, Sondergaard was portrayed by Actress Greta Scacchi while Jeff Goldblum was cast as Biberman.) With her career stalled, she supported her husband during the production of Salt of the Earth (1954).

In 1969, she appeared in an off-Broadway one-woman show entitled Woman. Sondergaard resumed her career in film and television around the same time. Her revived career extended into the early 1980s.

Following several strokes, she died from cerebral vascular thrombosis in the Motion Picture and Television Hospital in Woodland Hills, California, in 1985, aged 86. She had been admitted to the hospital in 1982.

One of the Hollywood Ten (2000) chronicled Sondergaard's relationship with Biberman and her role in the making of Salt of the Earth. The Bibermans sold their home in Hollywood shortly after they completed Salt of the Earth, and moved to New York where Sondergaard was able to work in theatre.