Part of a famous theatrical family, Bennett's maternal grandfather was Jamaica-born Shakespearean actor Lewis Morrison, who embarked on a stage career in the late 1860s. He was of English, Spanish, Jewish, and African ancestry. On the side of her maternal grandmother, Actress Rose Wood, the profession dated back to traveling minstrels in 18th century England.

Bennett first appeared in a silent movie as a child with her parents and sisters in her father's drama The Valley of Decision (1916), which he adapted for the screen. She attended Miss Hopkins School for Girls in Manhattan, then St. Margaret's, a boarding school in Waterbury, Connecticut, and L'Hermitage, a finishing school in Versailles, France.

On September 15, 1926, 16 year old Bennett married John M. Fox in London. They were divorced on July 30, 1928 in Los Angeles, on charges of his alcoholism. They had one child, Adrienne Ralston Fox (born February 20, 1928), for whom Bennett fought successfully in court to rename Diana Bennett Markey, when the child was eight years old, changed again to Diana Bennett Wanger in 1944.

Bennett's stage debut was at age 18, acting with her father in Jarnegan (1928), which ran on Broadway for 136 performances and for which she received good reviews. By age 19, she had become a movie star through such roles as Phyllis Benton in the mystery/thriller talkie Bulldog Drummond starring Ronald Colman, which was her first important role, and Lady Clarissa Pevensey opposite George Arliss in the biopic Disraeli (both 1929).

She made a number of radio appearances from the 1930s to the 1950s, performing on such programs as The Edgar Bergen and Charlie McCarthy Show, Duffy's Tavern, The Jack Benny Program, Ford Theater, Suspense and the anthology series Lux Radio Theater and Screen Guild Theater.

On March 16, 1932, she married screenwriter/film Producer Gene Markey in Los Angeles, but the couple divorced in Los Angeles on June 3, 1937. They had one child, Melinda Markey (born February 27, 1934, on Bennett's 24th birthday).

Bennett left Fox to play Amy, a pert sister competing with Katharine Hepburn's Jo in Little Women (1933), which was directed by George Cukor for RKO. This movie brought Bennett to the attention of independent film Producer Walter Wanger, who signed her to a contract and began managing her career. She played the role of Sally MacGregor, a psychiatrist's young wife slipping into insanity, in Private Worlds (1935) with Joel McCrea. She starred in the film Vogues of 1938 (1937), including the title sequence, where she donned a Diamond and platinum bracelet set with the Star of Burma ruby. Wanger and Director Tay Garnett persuaded Bennett to change her hair from blonde to brunette as part of the plot for her role as Kay Kerrigan in the scenic Trade Winds (1938) opposite Fredric March.

With her change in appearance, Bennett began an entirely new screen career as her persona evolved into that of a glamorous, seductive femme fatale. She played the role of Princess Maria Theresa in The Man in the Iron Mask (1939) opposite Louis Hayward, and the role of the Grand Duchess Zona of Lichtenburg in The Son of Monte Cristo (1940) opposite Hayward.

Combined with her sultry eyes and husky voice, Bennett's new brunette look gave her an earthier, more arresting persona. She won praise for her performances as Brenda Bentley in the crime/drama The House Across the Bay (1940), also featuring George Raft, and as Carol Hoffman in the anti-Nazi drama The Man I Married, a film in which Francis Lederer also starred.

She then appeared in a sequence of highly regarded film noir thrillers directed by Fritz Lang, with whom she and Wanger formed their own production company. Bennett appeared in four movies under Lang's direction, including as Cockney Jerry Stokes in Man Hunt (1941) opposite Walter Pidgeon, as mysterious model Alice Reed in The Woman in the Window (1944) with Edward G. Robinson, and as vulgar blackmailer Katharine "Kitty" March in Scarlet Street (1945), another film with Robinson.

Bennett was the shrewish, cuckolding wife, Margaret Macomber, in Zoltan Korda's The Macomber Affair (1947) opposite Gregory Peck, as the deceitful wife, Peggy, in Jean Renoir's The Woman on the Beach (also 1947) opposite Robert Ryan and Charles Bickford, and as the tormented blackmail victim Lucia Harper in Max Ophüls' The Reckless Moment (1949) opposite James Mason. Then, easily shifting images again, she changed her screen persona to that of an elegant, witty and nurturing wife and mother in two classic comedies directed by Vincente Minnelli.

Playing the role of Ellie Banks, wife of Spencer Tracy and mother of Elizabeth Taylor, Bennett appeared in both Father of the Bride (1950) and Father's Little Dividend (1951).

For twelve years, Bennett was represented by agent Jennings Lang. She and the onetime vice-president of the Sam Jaffe Agency, who now headed MCA's West Coast television operations, met on the afternoon of December 13, 1951, to talk over an upcoming TV show.

As the movie offers dwindled after the scandal, Bennett continued touring in stage successes, such as Susan and God, Once More, with Feeling, The Pleasure of His Company and Never Too Late. Her next TV appearance was in the role as Bettina Blane for an episode of General Electric Theater in 1954. Other roles include Honora in Climax! (1955) and Vickie Maxwell in Playhouse 90 (1957). In 1958, she appeared as the mother in the short-lived television comedy/drama Too Young to Go Steady to teenagers played by Brigid Bazlen and Martin Huston.

Bennett made only five movies in the decade that followed, as the shooting incident was a stain on her career and she became virtually blacklisted. Blaming the scandal that occurred for destroying her career in the motion picture industry, she once said, "I might as well have pulled the trigger myself." Although Humphrey Bogart, a longtime friend of Bennett, pleaded with the studio on her behalf to keep her role as Amelie Ducotel in We're No Angels (1955), that movie proved to be one of her last.

She starred on Broadway in the comedy Love Me Little (1958), which ran for only eight performances.

In the 1960s, she achieved success for her portrayal of Elizabeth Collins Stoddard on TV's Dark Shadows, for which she received an Emmy nomination (1968). For her final movie role, as Madame Blanc in Dario Argento's cult horror film Suspiria (1977), she received a Saturn Award nomination. In her New York Times obituary she was said to be "... one of the most underrated actresses of her time".

Despite the shooting scandal and the damage it caused Bennett's career, she and Wanger remained married until 1965. She continued to work steadily on the stage and in television, including her guest role as Denise Mitchell in an episode of TV's Burke's Law (1965).

Bennett received star billing on the gothic daytime television soap opera Dark Shadows, which attracted a major cult TV following, for its entire five-year run, 1966 to 1971, receiving an Emmy Award nomination in 1968 for her performance as Elizabeth Collins Stoddard, mistress of the haunted Collinwood Mansion. Her other roles on Dark Shadows were Naomi Collins, Judith Collins Trask, Elizabeth Collins Stoddard PT, Flora Collins, and Flora Collins PT. In 1970, she appeared as Elizabeth in House of Dark Shadows, the feature film adaptation of the series. She declined to appear in the sequel Night of Dark Shadows however, and her character Elizabeth was mentioned as being recently deceased.

Other TV guest appearances include Bennett's roles as Joan Darlene Delaney in an episode of The Governor & J.J. (1970) and as Edith in an episode of Love, American Style (1971). She starred in five made-for-TV movies between 1972 and 1982.

Bennett also appeared in one more feature film, as Madame Blanc in Italian Director Dario Argento's horror thriller Suspiria (1977), for which she received a 1978 Saturn Award nomination for Best Supporting Actress.

On February 14, 1978, she and retired publisher/movie critic David Wilde were married in White Plains, New York. Their marriage lasted until her death.

Of the scandal, in a 1981 interview, Bennett contrasted the judgmental 1950s with the sensation-crazed 1970s and 1980s. "It would never happen that way today," she said, laughing. "If it happened today, I'd be a sensation. I'd be wanted by all studios for all pictures."

Celebrated for not taking herself too seriously, Bennett said in a 1986 interview, "I don't think much of most of the films I made, but being a movie star was something I liked very much."

Bennett died of heart failure on Friday evening, December 7, 1990, at age 80 at her home in Scarsdale, New York. She is interred in Pleasant View Cemetery, Lyme, Connecticut, with her parents.