Highsmith was born Mary Patricia Plangman in Fort Worth, Texas. She was the only child of artists Jay Bernard Plangman (1889–1975), who was of German descent, and Mary Plangman (née Coates; September 13, 1895 – March 12, 1991). The couple divorced ten days before their daughter's birth.

In 1927, Highsmith, her mother and her adoptive stepfather, Artist Stanley Highsmith, whom her mother had married in 1924, moved to New York City. When she was 12 years old, Highsmith was sent to Fort Worth and lived with her grandmother for a year. She called this the "saddest year" of her life and felt "abandoned" by her mother. She returned to New York to continue living with her mother and stepfather, primarily in Manhattan, but also in Astoria, Queens.

Many of Highsmith's 22 novels were set in Greenwich Village, where she lived at 48 Grove Street from 1940 to 1942, before moving to 345 E. 57th Street. In 1942, Highsmith graduated from Barnard College, where she studied English composition, playwriting, and short story prose. After graduating from college, and despite endorsements from "highly placed professionals," she applied without success for a job at publications such as Harper's Bazaar, Vogue, Mademoiselle, Good Housekeeping, Time, Fortune, and The New Yorker.

From 1942–43, for the Sangor-Pines shop (Better/Cinema/Pines/Standard/Nedor), Highsmith wrote "Sergeant Bill King" stories and contributed to Black Terror and Fighting Yank comics; and wrote profiles such as Catherine the Great, Barney Ross, and Capt. Eddie Rickenbacker for the "Real Life Comics" series. From 1943–1946, under Editor Vincent Fago at Timely Comics, she contributed to its U.S.A. Comics wartime series, writing scenarios for comics such as Jap Buster Johnson and The Destroyer. During these same years she wrote for Fawcett Publications, scripting for Fawcett Comics characters "Crisco and Jasper" and others. Highsmith also wrote for Western Comics from 1945 to 1947.

In 1943, Highsmith had an affair with Artist Allela Cornell who, despondent over unrequited love from another woman, committed suicide in 1946 by drinking nitric acid.

After Israel declared independence following the 1948 Palestine war and 1948 Arab–Israeli War it seized control of three-quarters of the Palestine territory, and Highsmith aligned herself with Writers such as Gore Vidal, Alexander Cockburn, Noam Chomsky and Edward Said in supporting Palestinian self-determination. As a member of Amnesty International, she felt duty-bound to express publicly her opposition to the displacement of Palestinians. Highsmith prohibited her books from being published in Israel after the election of Menachem Begin as Prime Minister in 1977. She dedicated her 1983 novel People Who Knock on the Door to the Palestinian people:

Her short stories appeared for the first time in Ellery Queen's Mystery Magazine in the early 1950s.

In early September 1951, she began an affair with Sociologist Ellen Blumenthal Hill, traveling back and forth to Europe to meet with her. When Highsmith and Hill came to New York in early May 1953, their affair ostensibly "in a fragile state," Highsmith began an "impossible" affair with the German homosexual Photographer Rolf Tietgens, who had played a "sporadic, intense, and unconsummated role in her emotional life since 1943." She was reportedly attracted to Tietgens on account of his homosexuality, confiding that she felt with him "as if he is another girl, or a singularly innocent man." Tietgens shot several nude photographs of Highsmith, but only one has survived, torn in half at the waist so that only her upper body is visible. She dedicated The Two Faces of January (1964) to Tietgens.

Highsmith's second novel, The Price of Salt, was published in 1952 under the nom de plume Claire Morgan. Highsmith mined her personal life for the novel's content. Its groundbreaking happy ending and departure from stereotypical conceptions about lesbians made it stand out in lesbian fiction. In what BBC 2's "The Late Show" presenter Sarah Dunant described as a "literary coming out" after 38 years of disaffirmation, Highsmith finally acknowledged authorship of the novel publicly when she agreed to the 1990 publication by Bloomsbury retitled Carol. Highsmith wrote in the "Afterword" to the new edition:

In 1955, Highsmith wrote The Talented Mr. Ripley, a novel about Tom Ripley, a charming Criminal who murders a rich man and steals his identity. Highsmith wrote four sequels: Ripley Under Ground (1970), Ripley's Game (1974), The Boy Who Followed Ripley (1980) and Ripley Under Water (1991), about Ripley's exploits as a con Artist and serial killer who always gets away with his crimes. The series—collectively dubbed "The Ripliad"—are some of Highsmith's most popular works and have sold millions of copies worldwide.

Between 1959 and 1961, Highsmith was in love with author Marijane Meaker. Meaker wrote lesbian stories under the pseudonym "Ann Aldrich" and mystery/suspense fiction as "Vin Packer," and later wrote young adult fiction as "M.E. Kerr." In the late 1980s, after 27 years of separation, Highsmith began corresponding with Meaker again, and one day showed up on Meaker's doorstep, slightly drunk and ranting bitterly. Meaker later said she was horrified at how Highsmith's personality had changed.

Sam Jordison of The Guardian wrote, "It is near impossible, I would say, not to root for Tom Ripley. Not to like him. Not, on some level, to want him to win. Patricia Highsmith does a fine job of ensuring he wheedles his way into our sympathies." Film critic Roger Ebert made a similar appraisal of the character in his review of Purple Noon, Rene Clement's 1960 film adaptation of The Talented Mr. Ripley: "Ripley is a Criminal of intelligence and cunning who gets away with murder. He's charming and literate, and a Monster. It's insidious, the way Highsmith seduces us into identifying with him and sharing his selfishness; Ripley believes that getting his own way is worth whatever price anyone else might have to pay. We all have a little of that in us." Novelist Sarah Waters esteemed The Talented Mr. Ripley as the "one book I wish I'd written."

Highsmith endured cycles of depression, some of them deep, throughout her life. Despite literary success, she wrote in her diary of January 1970: "[I] am now cynical, fairly rich ... lonely, depressed, and totally pessimistic." Over the years, Highsmith suffered from female hormone deficiency, anorexia nervosa, chronic anemia, Buerger's disease, and lung cancer.

Several of Highsmith's works have been adapted for other media, some more than once. In 1978, Highsmith was President of the jury at the 28th Berlin International Film Festival.

From the beginning of the occupation of Palestine by Israel, Highsmith was an active supporter of Palestinian rights, a stance which, according to Carol Screenwriter Phyllis Nagy, "often teetered into outright antisemitism." When she was living in Switzerland in the 1980s, she used nearly 40 aliases when writing to various government bodies and newspapers deploring the state of Israel and the "influence" of the Jews. Nevertheless, many of the women she became romantically involved with as well as friends she valued were Jewish, such as Arthur Koestler, whom she met in October 1950 and with whom she had an unsuccessful affair designed to hide her homosexuality, believing that Marc Brandel's disclosure that she was homosexual would hurt her professionally. Moreover, Saul Bellow, also Jewish, was a favorite author.

Otto Penzler, her U.S. publisher through his Penzler Books imprint, had met Highsmith in 1983, and four years later witnessed some of her theatrics intended to create havoc at dinner tables and shipwreck an evening. He said after her death that "[Highsmith] was a mean, cruel, hard, unlovable, unloving human being…I could never penetrate how any human being could be that relentlessly ugly…. But her books? Brilliant.”

Highsmith described herself as a social democrat. She believed in American democratic ideals and in "the promise" of U.S. history, but she was also highly critical of the reality of the country's 20th-century culture and foreign policy. Tales of Natural and Unnatural Catastrophes, her 1987 anthology of short stories, was notoriously anti-American, and she often cast her homeland in a deeply unflattering light. Beginning in 1963, she resided exclusively in Europe. She retained her United States citizenship, despite the tax penalties, of which she complained bitterly while living for many years in France and Switzerland.

Highsmith contributed financially to the Jewish Committee on the Middle East, an organization founded in 1988 that represented American Jews who wanted the United States to "dissociate...from the policies of Israel." She wrote in an August 1993 letter to Marijane Meaker: "USA could save 11 million per day if they would cut the dough to Israel. The Jewish vote is 1%."

The paperback version of the novel sold nearly one million copies before its 1990 reissue as Carol. The Price of Salt is distinct for also being the only one of Highsmith's novels in which no violent crime takes place, and where her characters have "more explicit sexual existences" and allowed "to find happiness in their relationship."

She famously preferred the company of animals to that of people and stated in a 1991 interview, "I choose to live alone because my imagination functions better when I don't have to speak with people."

Her last novel, Small g: a Summer Idyll, was rejected by Knopf (her usual publisher by then) several months before her death, leaving Highsmith without an American publisher. It was published posthumously in the United Kingdom by Bloomsbury Publishing in March 1995, and nine years later in the United States by W.W. Norton.

According to Highsmith, her mother once told her that she had tried to abort her by drinking turpentine, although a biography of Highsmith indicates Jay Plangman tried to persuade his wife to have the abortion but she refused. Highsmith never resolved this love–hate relationship, which reportedly haunted her for the rest of her life, and which she fictionalized in "The Terrapin," her short story about a young boy who stabs his mother to death. Highsmith's mother predeceased her by only four years, dying at the age of 95.

The first three books of the "Ripley" series have been adapted into films five times. In 2015, The Hollywood Reporter announced that a group of production companies were planning a television series based on the novels. The series is currently in development.