Powell was the second son and youngest child of Thomas william Powell, a hop farmer, and Mabel, daughter of Frederick Corbett, of Worcester, England. Powell was born in Bekesbourne, Kent, and educated at The King's School, Canterbury and then at Dulwich College. He started work at the National Provincial Bank in 1922 but quickly realised he was not cut out to be a banker.

Powell entered the film industry in 1925 through working with Director Rex Ingram at the Victorine Studios in Nice, France (the contact with Ingram was made through Powell's father, who owned a hotel in Nice). He first started out as a general studio hand, the proverbial "gofer": sweeping the floor, making coffee, fetching and carrying. Soon he progressed to other work such as stills photography, writing titles (for the silent films) and many other jobs including a few acting roles, usually as comic characters. Powell made his film début as a "comic English tourist" in The Magician (1926).

Returning to England in 1928, Powell worked at a diverse series of jobs for various filmmakers including as a stills Photographer on Alfred Hitchcock's silent film Champagne (1928). He also signed on in a similar role on Hitchcock's first "talkie", Blackmail (1929). In his autobiography, Powell claims he suggested the ending in the British Museum which was the first of Hitchcock's "monumental" climaxes to his films. Powell and Hitchcock remained friends for the remainder of Hitchcock's life.

Although he had taken on some directing responsibilities in other films, Powell had his first screen credit as a Director on Two Crowded Hours (1931). This thriller was considered a modest success at the box office despite its limited budget. From 1931 to 1936, Powell was the Director of 23 films, including the critically received Red Ensign (1934) and The Phantom Light (1935).

In 1937 Powell completed his first truly personal project, The Edge of the World. Powell gathered together a cast and crew who were willing to take part in an expedition to what was then a very isolated part of the UK. They had to stay there for quite a few months and finished up with a film which not only told the story he wanted but also captured the raw natural beauty of the location.

Aside from some short films, Powell wrote, produced and directed all of his films from 1939 to 1957 with Emeric Pressburger

They both soon recognised that although they were total opposites in background and personality, they had a Common attitude to film-making and that they could work very well together. After making two more films together (Contraband (1940) and 49th Parallel) with separate credits, the pair decided to form a partnership and to sign their films jointly as "Written, Produced and Directed by Michael Powell and Emeric Pressburger."

In 1927 Powell married Gloria Mary Rouger, an American dancer; they were married in France and stayed together for only three weeks. During the 1940s, Powell had love affairs with actresses Deborah Kerr and Kathleen Byron. From 1 July 1943 until her death on 5 July 1983, Powell was married to Frances "Frankie" May Reidy, the daughter of medical practitioner Jerome Reidy; they had two sons: Kevin Michael Powell (b. 1945) and Columba Jerome Reidy Powell (b. 1951). He also lived with Actress Pamela Brown for many years until her death from cancer in 1975.

Although admirers would argue that Powell ought to rank alongside fellow British Directors Alfred Hitchcock and David Lean, his career suffered a severe Reversal after the release of the controversial psychological thriller film Peeping Tom, made in 1960 as a solo effort. The film was excoriated by mainstream British critics, who were offended by its sexual and violent images; Powell was ostracized by the film industry and found it almost impossible to work thereafter.

The film did however meet with the rapturous approval of the young critics of Positif and Midi-Minuit Fantastique in France, and those of Motion in England, and in 1965 he was subject of a major positive revaluation by Raymond Durgnat in the auteurist magazine Movie, later included in Durgnat's influential book A Mirror for England.

Powell's films came to have a cult reputation, broadened during the 1970s and early 1980s by a series of retrospectives and rediscoveries, as well as further articles and books. By the time of his death, he and Pressburger were recognised as one of the foremost film partnerships of all time – and cited as a key influence by many noted filmmakers such as Martin Scorsese, Brian De Palma, and Francis Ford Coppola.

Many film-makers such as Martin Scorsese, Francis Ford Coppola and George A. Romero have cited Powell as an influence. In 1981, he received the BAFTA Academy Fellowship Award along with his partner Pressburger, the highest honour the British Film Academy can give a filmmaker.

Subsequently, Powell was married to film Editor Thelma Schoonmaker from 19 May 1984 until his own death from cancer at his home in Avening, Gloucestershire.

Working together as co-producers, Writers and Directors in a partnership they dubbed "The Archers", they made 19 feature films, many of which received critical and commercial success. Their best films are still regarded as classics of 20th century British cinema. The BFI 100 list of "the favourite British films of the 20th century" contains five of Powell's films, four with Pressburger.