Parveen was born in Junagadh, Gujarat. She was born into a Muslim family. She did her early schooling from Mount Carmel High School, Ahmedabad and later attended St. Xavier's College, Ahmedabad where she earned a Bachelor of Arts in English literature. Her father, Vali Mohammed Khan Babi, (died 1959), was a system administrator with the Nawab of Junagadh and Jamal Bakhte Babi (died 2001). Parveen was born fourteen years after the marriage of her parents and was their only child. She lost her father at the age of ten.

As Babi's personality symbolised western standards, it would be difficult for Bollywood producers to personify her role in Indian sentiments. Hence she was given roles which were glamorous and represented standards of a film star quality and established her status as one of the "Top Heroines of Bollywood" or the "Commercially successful Heroine" and this paved the way to differ herself from the other contemporary Actress in Bombay's film industry. She had appeared in most of the commercially successful films of that era and her famous co-stars include Amitabh Bachchan, Shashi Kapoor, Feroz Khan, Dharmendra, Rajesh Khanna, Vinod Khanna, Manoj Kumar and Rishi Kapoor who were all the leading stars of 1970s and 1980s. In her acting career, which spanned almost ten years, she has acted in more than fifty films, of which ten were considered to be best. These films were also the blockbusters of those times. Parveen Babi replaced the image of saree-clad, conventional Indian lead actresses with a glamorous woman look. She never shied away from portraying roles of women having a live-in relationship with men and consuming alcohol openly, both of which were taboo in those times. She undeniably lit up and overpowered the screen with her presence. The fact that Parveen was paired with Amitabh Bachchan in eight films during the peak of the Big B mania attests to her stature and star power. It seems to have been taken that only a superstar of Bachchan's stature could stand side by side with the presence of Parveen Babi. Amitabh and Parveen complemented each other in the heady first years of the Angry Young Man phenomenon.

Parveen's modelling career began in 1972 and was quickly followed by her film debut with the film Charitra (1973), opposite cricketer Salim Durani. The film was a resounding flop, but Parveen was noticed and was snapped up for several more films. Her first major hit was Majboor (1974), opposite Amitabh Bachchan. Along with Zeenat Aman, Parveen Babi helped change the image of the Indian film heroine. She was the first Bollywood star to appear on the front page of Time in July 1976, much to the amazement of her contemporaries.

After withdrawing from show Business, she took up keen interests in music, piano, painting, architecture, literature, writing, cultural and archaeological study, politics, photography, sculpture and human rights issues. She also made numerous contributions to newspapers and magazines from 1973 to 1992.

Her memorable roles include "Jenny" in Amar Akbar Anthony (1977), "Sunita" in Shaan and "Anita" in Deewaar. She was also the original choice for the female protagonist in Silsila along with Smita Patil, but was later dropped by Yash Chopra, who stated that while Babi was fine, Smita Patil was hurt, mainly because the filmmaker had asked actor friend Shashi Kapoor to pass the bad news to Smita.

Parveen was considered to be one of the most successful actresses of her era, along with Hema Malini, Rekha, Zeenat Aman, Jaya Bhaduri, Reena Roy and Raakhee. She starred opposite Amitabh Bachchan in eight films, all of which were either hits or super-hits. She also starred in other hit films such as Suhaag (1979), Kaala Patthar (1979), and Namak Halaal (1982) opposite Shashi Kapoor, Kala Sona (1975) opposite Feroz Khan, Chandi Sona (1977) opposite Sanjay Khan and Jaani Dost (1983) opposite Dharmendra. Towards the end of her career, she appeared in offbeat films such as Vinod Pande's Yeh Nazdeekiyan (1982), playing the role of the "other woman" opposite Marc Zuber, and Dil... Akhir Dil Hai (1982), opposite Naseeruddin Shah.

Parveen never married, but media tabloids speculated that she may have had relationships with men in the film industry such as Director Mahesh Bhatt as well as actors Kabir Bedi and Danny Denzongpa. She was also rumoured to have had an affair with her co-star of many films, Amitabh Bachchan, with whom she later developed irrational fears as she accused him of trying to kill her. Bhatt later wrote and directed Arth (1982), a supposedly semi-autobiographical film about his relationship with Babi, and wrote and produced Woh Lamhe (2006), based on his recollection and interpretation of his relationship with Parveen and without any inputs from her. It is uncertain whether Woh Lamhe is a truthful semi-autobiography of Babi, rather the details of her character in the movie appears to be a fabrication and manipulative narration of her life.

Nevertheless, she started a career as an interior decorator in 1983. In 2002, she again hit the headlines when she filed an affidavit in a special court hearing of the 1993 serial bomb blasts case, claiming that she had gathered clinching evidence against actor Sanjay Dutt showing his involvement in the case, but she did not turn up in court after being summoned, saying that she was afraid of being killed. In the last four years of her life, Babi recorded every phone call, always punctiliously informing the caller about surveillance.

She accused many foreign dignitaries as well as Indian film personalities including Amitabh Bachchan, Bill Clinton, Robert Redford, Prince Charles, Al Gore, US government, British government, French government, BJP government, Roman Catholic Church, CIA, CBI, KGB, Mossad of conspiring to kill her, but her petition in court was dismissed for lack of evidence and when she was asked to show her evidences by the press, it was some sort of scribblings on a notepad. In an Interview to a film magazine dated 1989, she said: "Amitabh Bachchan is a super international gangster. He is after my life. His goons kidnapped me and I was kept on an Island where they performed a surgery on me and planted one transmitter/chip/electronic bug right under my ear." There was a photograph of Babi showing a scar below her ears.

She was said to have lived lonely and converted to Christianity during the late 1990s and also ate pork because she found not eating pork as racist.

In an interview in 1998, she said: "I was born a Muslim and later, I converted to Christianity. But I have never done things I didn't believe. Even when I was a Muslim, I didn't understand why it made me a more spiritual entity, if I did not eat pork. I always felt that the essence of spirituality lies in being a good human and following good, positive principles. The Golden Dragon Chinese restaurant at the Taj, those days, was quite famous for pork delicacies and every time I got a break from shooting, I would rush off to the Golden Dragon. Whenever my friends questioned me about my eating pork, I would say that it was more important for me to be a human being than a racist."

Parveen Babi converted to Christianity during the last years of her life, as she stated in an interview, and was baptised in a Protestant Anglican Church at Malabar Hill. and expressed a Desire to be buried as per Christian rites, but her relatives who were Muslims claimed her body after her death and buried her as per Islamic rites. Hence Babi was buried next to her mother at Santacruz, Mumbai on 23 January 2005.