He was a friend of Rolling Thunder, a Shoshone Medicine man. He has also been a friend of Leonard Peltier, a Native American Activist and member of the American Indian Movement (AIM) since the 1960s and, along with author Peter Mathiessen, is one of Peltier's two non-native advisers.

While a student at Grinnell College, Iowa in 1961, Coyote was one of the organizers of a group of twelve students who traveled to Washington, D.C. during the Cuban Missile Crisis supporting U.S. President John F. Kennedy's "peace race". Kennedy invited the group into the White House, the first time protesters had ever been so recognized, and they met for several hours with McGeorge Bundy. The group received wide press coverage. They mimeographed the resulting headlines and sent them to every college in the United States.

Once he graduated from Grinnell College with a BA in English literature in 1964, Coyote moved to the west coast, despite having been accepted at the Iowa Writers' Workshop, and commenced working towards a master's degree in creative writing at San Francisco State University.

Many of Coyote's stories from the 1967 to 1975 counter-culture period are included in his memoir, Sleeping Where I Fall, published by Counterpoint Press in April 1998. One of the stories incorporated into his book is "Carla's Story," about a 16-year-old mother who lived communally with Coyote, and who, after learning of her husband's murder, became a drug addict, then a prostitute, had her children stolen, and continued to spiral downhill until she turned her life around. This story was published in Zyzzyva, and awarded the 1993–1994 Pushcart Prize. He also states he was a close friend of singer Janis Joplin. Coyote has a website, which features the titles of all his movies and extended samples of much of his writing. He is a member at RedRoom.com, a web-site for authors.

In keeping with his dedication to community-based art, Peter Coyote was employed in the early 1970s by the San Francisco Arts Commission in the historical Neighborhood Arts Program (NAP), with funding from the Comprehensive Employment and Training Act (CETA, Pub.L. 93–203), a United States federal law enacted by Congress, signed into law by President Richard Nixon, 1973 to train workers and provide them with jobs in the public Service. The San Francisco Arts Commission's Neighborhood Arts/CETA Program was the first in the country to use CETA funds to hire artists to work in Service to a city. From this position, Coyote was appointed by Governor Jerry Brown to be a member of the California Arts Council, the state agency which determines art policy for the state. He served on the CAC from 1975 to 1983. After his first year, Coyote was elected chairman by his peers three years in a row and during his tenure as chairman, the Council's overhead expenses dropped from 50% to 15%, the lowest in the State, and the Arts Council budget rose from $1 million to $16 million. More importantly, his council introduced the idea of artists as "creative Problem solvers" and by paying artists to "solve problems for the state" rather than make art, they bypassed the objections of many conservative lawmakers. Coyote engineered relationships with 14 departments of State which began to use artists in a variety of capacities, paying 50 cents on the dollar for it. It was an immense success and gave him the confidence (after 12 years in the counter-culture) to try his hand at film-acting.

Beginning in 1975, Coyote undertook meditation practice and eventually became a dedicated practitioner of American Zen Buddhism, moving into the San Francisco Zen Center. He was later ordained a lay priest in the Sōtō tradition and was ordained as a Zen Priest in 2015.

In 1978, Coyote began acting again ("to shake the rust out") appearing in plays at San Francisco's award-winning Magic Theatre. While playing the lead in the World Premiere of Sam Shepard's True West, a Hollywood agent approached him, and his film career began with Die Laughing (1980). He gave supporting performances in Tell Me a Riddle (1980), Southern Comfort (1981) and as the mysterious scientist "Keys" in E.T. The Extra-Terrestrial (1982). He was seriously considered for the role of Indiana Jones in Raiders of the Lost Ark (1981), and auditioned for the part. Coyote's first starring role was in the science fiction adventure Timerider: The Adventure of Lyle Swann (1982). He also starred in Jagged Edge (1985) and Outrageous Fortune (1987). Since then, he has made more than 120 films for theaters and television and has played starring roles for many Directors, including Roman Polanski (Bitter Moon), Pedro Almodóvar (Kika), Martin Ritt (Cross Creek), Jean-Paul Rappeneau (Bon Voyage), Diane Kurys (A Man in Love) and Walter Salles (Exposure). For his 1990 guest appearance on the television series Road to Avonlea, he received his first Primetime Emmy Award nomination.

Coyote's left-wing politics are evident in his articles for Mother Jones magazine, some of which he wrote as a delegate to the 1996 Democratic National Convention; in his disagreements with David Horowitz; and in his autobiography Sleeping Where I Fall. In 2006, he developed a political television show for Link TV called "The Active Opposition" and in 2007 created Outside the Box with Peter Coyote starting on Link TV's special, Special: The End of Oil – Part 2.

Coyote's voice work includes narrating the opening ceremony of the 2002 Winter Olympics and Apple's iPad Retina Display campaign. He narrated the PBS series The Pacific Century (1992), winning an Emmy, and six documentaries directed or produced by Ken Burns: The West (1996), The National Parks: America's Best Idea (2009), Prohibition (2011), The Dust Bowl (2012), The Roosevelts: An Intimate History (2014) and The Vietnam War (2017). He won a Primetime Emmy Award for Outstanding Narrator in 2015 for his work on The Roosevelts. His voice has often been said to resemble that of actor Henry Fonda.

Also in 2005, Coyote served as the narrator for several prominent projects including the documentary film Enron: The Smartest Guys in the Room and the National Geographic-produced PBS documentary based on Jared Diamond's Guns, Germs, and Steel. He also narrated an episode of the series Lost in April 2006. In 2008, he narrated Torturing Democracy, a documentary produced by PBS which details the George W. Bush administration's use of "enhanced interrogation techniques" in the War on Terror. He also narrated the 12-hour Ken Burns series on the National Parks, and 15 episodes for the National Geographic Explorer series. In 2010 he narrated the documentary Solitary Confinement on the effect of long-term isolation, with footage taken from Colorado State Penitentiary where all prisoners are held this way. In 2014, he appeared in the TNT television series Perception, as the father of the main character, Dr. Daniel Pierce, and narrated Burns' The Roosevelts: An Intimate History; the latter saw him win his first Primetime Emmy Award.

In April, 2015, his memoir The Rainman's Third Cure: An Irregular Education was released, where he "provides portraits of mentors that shaped him— including his violent, intimidating father, a bass player, a Mafia Consiglieri, and beat poet Gary Snyder, who introduces him to the practice of Zen."