Blatty was born on January 7, 1928, in New York City. He was the fifth and youngest child of Lebanese immigrants, Mary (née Mouakad), a devout Catholic and the niece of a bishop, and Peter Blatty, a cloth cutter. His parents separated when he was a toddler. He was raised in what he described as "comfortable destitution" by his deeply religious mother, whose sole support came from peddling homemade quince jelly in the streets of Manhattan; she once offered a jar of it to Franklin D. Roosevelt when the President was cutting the ribbon for the Queens–Midtown Tunnel, telling him, "For when you have company." He lived at 28 different addresses during his childhood because of nonpayment of rent. "We never lived at the same address in New York for longer than two or three months at a time," Blatty told The Washington Post in 1972. "Eviction was the order of the day." Blatty's mother died in 1967.

He attended Brooklyn Preparatory, a Jesuit school, on a scholarship and graduated as class valedictorian in 1946. He later attended Georgetown University on a scholarship, where he earned his bachelor's degree in English in 1950. Those years at Georgetown were probably the best years of my life, Blatty said in 2015. Until then, I’d never had a home. While studying for his master's degree at George Washington University, Blatty took menial jobs. Initially unable to find a job in teaching, he worked as a vacuum cleaner door-to-door salesman, a beer truck driver, and as a United Airlines ticket agent. He earned his master's in English literature from the George Washington University in 1954. He then enlisted in the United States Air Force, where he ultimately became head of the Policy Branch of the USAF Psychological Warfare Division.

Blatty married four times and had seven children. With his first wife, Mary Margaret Rigard, whom he married on February 18, 1950, he had three children: Christine Ann, Michael Peter, and Mary Joanne. His second wife was Elizabeth Gilman, whom he married in 1965. In July 1975 he married his third wife, tennis professional Linda Tuero with whom he had two children. Following the dissolution of his first three marriages, Blatty married Julie Alicia Witbrodt, his fourth wife, in 1983, with whom he had two children. The couple remained together until Blatty's death in 2017. After residing for many years in Hollywood and Aspen, Blatty settled in Bethesda, Maryland in 2000.

He then published the comic novels: John Goldfarb, Please Come Home! (1963), I, Billy Shakespeare (1965), and Twinkle, Twinkle, "Killer" Kane (1966). He achieved critical success with these books – Marvin Levin in the New York Times, for Example, wrote: "Nobody can write funnier lines than william Peter Blatty, a gifted virtuoso who writes like [S. J.] Perelman"; but significant sales were lacking. It was at this point that Blatty began a collaboration with Director Blake Edwards, writing scripts for comedy films such as: A Shot in the Dark (1964), What Did You Do in the War, Daddy? (1966), Gunn (1967), and Darling Lili (1970), a musical starring Julie Andrews and Rock Hudson. Blatty also worked on his own using the name "Bill Blatty" writing comedy screenplays such as those for the Danny Kaye film The Man from the Diners' Club (1963), and the Warren Beatty/Leslie Caron film Promise Her Anything (1965). Other screenplays include the film adaptation of John Goldfarb, Please Come Home! (1965), and The Great Bank Robbery (1969).

Later Blatty resumed writing fiction. In 1971, he wrote The Exorcist, the story of a twelve-year-old girl possessed by a powerful demon, that topped The New York Times bestseller list for 17 weeks and remained on the list for 57 consecutive weeks. The book sold more than 13 million copies in the United States alone and was translated into over a dozen languages. He later adapted it with Director william Friedkin into the film version. Blatty went on to win an Academy Award for his Exorcist screenplay, as well as Golden Globes for Best Picture and Best Writing. It also became the first horror film ever to be nominated for the best picture Oscar.

In 1978, Blatty adapted his novel Twinkle, Twinkle, "Killer" Kane into a film titled The Ninth Configuration, and in 1980 he wrote, directed, and produced a film version, which focused on the question of the existence of God. The film was a commercial flop despite critical acclaim. Movie critic Jerry Stein called it a "masterpiece" in The Cincinnati Post, and Peter Travers described it as "the finest large-scale American surrealist film ever made" in People magazine. In 1981 it was nominated for three Golden Globes, and won the Best Writing Award against competition that included The Elephant Man (1980), Ordinary People (1980), and Raging Bull (1980). In 1983, Blatty wrote Legion, a sequel to The Exorcist which later became the basis of the film The Exorcist III. At first he was unable to set up the production because he wanted to direct the film. Blatty's agent, Steve Jaffe, helped package the project with Producer Carter DeHaven at Morgan Creek Productions. Blatty directed the film. He originally wanted the movie version to be titled Legion, but the film's producers wanted it to be more closely linked to the original. The first sequel, Exorcist II: The Heretic (1977), was disappointing both critically and commercially. Blatty had no involvement with it and his own follow-up ignored it entirely.

Studies of Blatty's work include G. S. J. Barclay's Anatomy of Horror: The Masters of Occult Fiction. Critical essays on Blatty's work include Douglas E. Winter's essay in A Dark Night's Dreaming: Contemporary American Horror Fiction, and S. T. Joshi's essay "William Peter Blatty: The Catholic Weird Tale" in The Modern Weird Tale: A Critique of Horror Fiction (2001). Essays studying all Blatty's novels can be found in Benjamin Szumskyj's American Exorcist: Critical Essays on william Peter Blatty (McFarland, 2008).

Blatty's son Peter Vincent Blatty died from a rare heart disorder in 2006 at the age of 19. His death was the subject of Blatty's non-fiction book that is "part comic memoir, part argument for life after death", titled, Finding Peter: A True Story of the Hand of Providence and Evidence of Life After Death (2015).

In 2011, The Exorcist was re-released in a 40th Anniversary Edition in paperback, hardcover, and audiobook formats with new cover artwork. As described by Blatty, this new, updated edition features new and revised material.

Blatty was a Roman Catholic. In 2012, he filed a canon law petition against his alma mater Georgetown University. According to Blatty, the school for decades has been at variance with Catholic church teaching by inviting speakers who support abortion rights, and disobeying Pope John Paul II's instructions issued to church-affiliated colleges and universities in 1990.

The Exorcist was eventually adapted into a stage play starring Richard Chamberlain and Brooke Shields in 2012 and a TV mini-series some years later. The TV series debuted on Fox in 2016. Internationally, the series premiered in Brazil on FX on September 23, 2016, the same day as in the U.S. It premiered in Australia on showcase on December 4, 2016.

Blatty died of multiple myeloma on January 12, 2017, at a hospital in Bethesda, five days after his 89th birthday.