Itami studied acting at an acting school called Budai Geijutsu Gakuin in Tokyo. In January 1960 he joined Daiei Film and was given the stage name Itami Ichizō (伊丹 一三) by Masaichi Nagata. In May 1960, Itami married Kazuko Kawakita, the daughter of film Producer Nagamasa Kawakita. He first acted on screen in Ginza no Dora-Neko (1960). In 1961 he left Daiei and started to appear in foreign-language films such as 55 Days at Peking. In 1965 he appeared in the big-budget Anglo-American film Lord Jim. In 1965 he published a book of essays which became a hit, Yoroppa Taikutsu Nikki ("Diary of boredom in Europe"). In 1966 he and Kazuko agreed to divorce.

In 1967, when working with Nagisa Oshima on a film Sing a Song of Sex (Nihon Shunka Kō) he met Nobuko Miyamoto. He and Miyamoto married in 1969. Around this time, he changed his stage name to "伊丹 十三" (Itami Jūzō) with the kanji "十" (ten) rather than "一" (one), and worked as a character actor in film and television.

In 1968 he played Saburo Ishihara, the father of Takeshi and Koji during season II, in the series for children Cometo-San. He is well known for these series, even today, in most Spanish speaking countries along singer Yumiko Kokonoe who played Cometo-San.

In the 1970s, he joined the TV Man Union television production company and produced and presented documentaries for television, which influenced his later career as a film Director. He also worked as a reporter for a TV programme called Afternoon Show.

In 1983, Itami played the father in Yoshimitsu Morita's The Family Game, and The Makioka Sisters for which roles he won the Yokohama Film Festival and Hochi Film Award for Best Supporting Actor.

Itami's debut as Director was the movie Osōshiki (The Funeral) in 1984, at the age of 50. This film proved popular in Japan and won many awards, including Japanese Academy Awards for Best Picture, Best Director, and Best Screenplay. However, it was his second movie, the "noodle western" Tampopo, that earned him international exposure and acclaim.

On May 22, 1992, six days after the release of his anti-yakuza satire Minbō no Onna, Itami was attacked, beaten, and slashed on the face by five members of the Goto-gumi, a Shizuoka-based yakuza clan, who were angry at Itami's film's portrayal of yakuza members. This attack led to a government crackdown on the yakuza.

He died on December 20, 1997 in Tokyo, after falling from the roof of the building where his office was located, after the press published evidence that he was having an extramarital affair. The suicide letter he reportedly left behind denied any involvement in such an affair. One theory is that Itami's suicide was forced by members of the Goto-gumi yakuza faction. A former member of the Goto-gumi faction told Journalist Jake Adelstein in 2008, “We set it up to stage his murder as a suicide. We dragged him up to the rooftop and put a gun in his face. We gave him a choice: jump and you might live or stay and we’ll blow your face off. He jumped. He didn’t live.”

His brother-in-law and childhood friend Kenzaburo Oe wrote The Changeling (2000), which modeled their relationship.

Itami was born Yoshihiro Ikeuchi in Kyoto. The name Itami was passed on from his father, Mansaku Itami—who was a renowned satirist and film Director before World War II. He was the brother-in-law of Kenzaburō Ōe and uncle of Hikari Ōe. He played the father Ishihara in the comic TV program Cometa-san.