Castle-Hughes was born in 1990 in Donnybrook, Western Australia, to a Māori mother, Desrae Hughes, and Tim Castle, an Anglo-Australian father. Her family moved to Auckland, New Zealand when she was four years old. She attained citizenship in 2001. Castle-Hughes attended Penrose High School and graduated from Senior College of New Zealand in Auckland.

In 2002, Castle-Hughes made her debut in the film Whale Rider, in which she played the main role of Paikea Apirana (Pai). Due to not having any previous acting experience, she went directly from her Auckland school classroom to the film set when the shoot began in New Zealand in late 2001. Castle-Hughes received widespread critical acclaim for her performance, and in 2004 she received an Academy Award nomination for Best Actress at the 76th Academy Awards. Although she did not win the Best Actress award (it went to Charlize Theron for Monster), at age 13 she became the youngest person nominated in this category at the time and the second Polynesian Actress, after Jocelyne LaGarde, to be nominated for an Oscar.

She soon followed the role by appearing in Prince's controversial "Cinnamon Girl" music video and with a shoot in Vanity Fair magazine. In 2004, Castle-Hughes was invited to join the Academy of Motion Picture Arts and Sciences.

In 2005, Castle-Hughes had a small part as Queen Apailana in Star Wars: Episode III – Revenge of the Sith. In 2006, she portrayed the starring role of the Virgin Mary in The Nativity Story. New York Times critic, A. O. Scott, said that she "seemed entirely unfazed by the demands of playing Mary. She had the poise and intelligence to play the character not as an icon of maternity, but rather as a headstrong, thoughtful adolescent transformed by an unimaginable responsibility." The Christian-themed film earned only $8 million during its opening week, but its box office surged during the week of Christmas,.

In October 2006, it was announced that Castle-Hughes and boyfriend Bradley Hull were expecting a child together. Their daughter, Felicity-Amore Hull, was born on 25 April 2007. Castle-Hughes and Hull broke up in 2010 after seven years together.

In 2008 Castle-Hughes appeared in the Australian comedy-drama film Hey, Hey, It's Esther Blueburger, which was filmed in late 2006.

Castle-Hughes campaigned for Greenpeace as part of the SignOn.org.nz climate campaign in 2009. New Zealand Prime Minister John Key initially admonished her to "stick to acting", but offered a week later to discuss the issues with her over tea after she maintained she knew more about them than he gave her credit for.

Castle-Hughes starred in the Japanese horror film Vampire, and she also played a recurring role as Axl's flatmate in The Almighty Johnsons which premiered in 2011. In 2011 Castle-Hughes also played a minor part in the film Red Dog as Rosa the veterinary assistant and wife of Vanno.

In 2012, Castle-Hughes began dating Jonathan Morrison. After six weeks together, the couple became engaged in August 2012. Their wedding took place on Valentine's Day 2013. They were divorced December 2016.

Since she made her film debut, Castle-Hughes has appeared in various films including Hey, Hey, It's Esther Blueburger, Piece of My Heart and Star Wars: Episode III – Revenge of the Sith. She also performed as Mary of Nazareth in the 2006 film The Nativity Story. In 2015, she joined the cast of the HBO TV series Game of Thrones in Season 5 as Obara Sand.

In early 2014, Castle-Hughes revealed that she has bipolar disorder, in the wake of television personality Charlotte Dawson's suicide.

In 2015 she joined the cast of the HBO TV series Game of Thrones in Season 5 as Obara Sand. She pursued a role on the show in part because she is a fan of the books. Castle-Hughes found out that she had won the role the night the Season 4 episode "The Mountain and the Viper" aired, in which her on-screen father's death was shown. She described having a very intense emotional reaction to the scene, because of the connection between the characters on the show.