Peters first performed on the stage as a child and then a teenage actor in the 1960s, and in film and television in the 1970s. She was praised for this early work and for appearances on The Muppet Show, The Carol Burnett Show and in other television work, and for her roles in films like Silent Movie, The Jerk, Pennies from Heaven and Annie. In the 1980s she returned to the theatre, where she became one of the best-known Broadway stars over the next three decades. She also has recorded six solo albums and several singles, as well as many cast albums, and performs regularly in her own solo concert act. Peters also continues to act in films and on television, where she has been nominated for three Emmy Awards and three Golden Globe Awards, winning once.

Peters is particularly noted for her starring roles in stage musicals, including Song and Dance, Sunday in the Park with George, Into the Woods, Annie Get Your Gun, and Gypsy, becoming closely associated with composer Stephen Sondheim. She had a four-year romantic relationship with comedian Steve Martin and was married to investment adviser Michael Wittenberg for over nine years until he was killed in a helicopter crash on September 26, 2005. Peters is known for her charitable work, including as a founder of the Broadway Barks animal charity.

Peters was born Bernadette Lazzara to an Italian-American family in Queens, New York, the youngest of three children. Her siblings are casting director Donna DeSeta and Joseph Lazzara. Her father Peter drove a bread delivery truck, and her mother, Marguerite (née Maltese), started her in show business by putting her on the television show Juvenile Jury at the age of three-and-a-half. She appeared on the television shows Name That Tune and several times on The Horn and Hardart Children's Hour at age five.

In January 1958, at age nine, she obtained her Actors Equity Card in the name of Bernadette Peters to avoid ethnic stereotyping, with the stage name taken from her father's first name. She made her professional stage debut the same month in This is Goggle, a comedy directed by Otto Preminger that closed during out-of-town tryouts before reaching New York. She then appeared on NBC television in A Boy Called Ciske, a Kraft Theatre production, on May 28, 1958, and as Anna Stieman in The Christmas Tree, a Hallmark Hall of Fame production, on December 14, 1958. She first appeared on the New York stage at age 10 in the New York City Center revival of The Most Happy Fella (1959). In her teen years, she attended the Quintano's School for Young Professionals, a former private school that several famous people, such as Steven Tyler, attended.

At age 13, Peters appeared as one of the "Hollywood Blondes" and was an understudy for "Dainty June" in the second national tour of Gypsy. During this tour Peters first met her long-time accompanist, conductor and arranger Marvin Laird, who was the assistant conductor for the tour. Laird recalled, "I heard her sing an odd phrase or two and thought, 'God that's a big voice out of that little girl,'" The next summer, she played Dainty June in summer stock, and in 1962 she recorded her first single. In 1964 she played Leisl in The Sound Of Music and Jenny in Riverwind in summer stock at the Mt. Gretna Playhouse (Pennsylvania), and Riverwind again at the Bucks County Playhouse in 1966. Upon graduation from high school, she started working steadily, appearing Off-Broadway in the musicals The Penny Friend (1966) and Curley McDimple (1967) and as a standby on Broadway in The Girl in the Freudian Slip (1967). She made her Broadway debut in Johnny No-Trump in 1967 and next appeared as George M. Cohan's sister opposite Joel Grey in George M! (1968), winning the Theatre World Award.

It was Peters' performance as "Ruby" in the 1968 Off-Broadway Dames at Sea, a spoof of 1930s musicals, that brought her critical acclaim and her first Drama Desk Award. She had appeared in an earlier 1966 version of Dames at Sea at the Off-Off-Broadway performance club Caffe Cino. Peters had starring roles in her next Broadway vehicles—Gelsomina in La Strada (1969) and Hildy in On the Town (1971), for which she received her first Tony Award nomination. She played Mabel Normand in Mack and Mabel (1974), receiving another Tony nomination. Clive Barnes wrote: "With the splashy Mack & Mabel ... diminutive and contralto Bernadette Peters found herself as a major Broadway star." Although these had short runs, Peters was singled out for praise by the critics, and the Mack and Mabel cast album became popular among musical theatre fans. She moved to Los Angeles in the early 1970s to concentrate on television and film work.

Peters has appeared in 32 feature films or television movies beginning in 1973, including Mel Brooks' 1976 film Silent Movie (for which she was nominated for a Golden Globe Award), the musical Annie (1982), Pink Cadillac (1989), in which she co-starred with Clint Eastwood, and Woody Allen's Alice (1990).

She starred opposite Steve Martin in The Jerk (1979), in a role that he wrote for her, and Pennies From Heaven (1981), for which she won the Golden Globe Award as Best Motion Picture Actress in a Comedy or Musical. They had begun a romantic relationship in 1977 that lasted approximately four years. By 1981, her popularity had led to Peters appearing on the cover and in a spread in the December issue of Playboy Magazine, in which she posed in lingerie designed by Bob Mackie.

Peters appeared with three generations of the Kirk Douglas family in the 2003 film It Runs in the Family, in which she played the wife of Michael Douglas's character. In May 2006 she appeared in the movie Come le formiche (Wine and Kisses) with F. Murray Abraham, filmed in Italy, playing a rich American who becomes involved with an Italian family that owns a vineyard. The DVD was released in 2007 in Italy. She is starring in a film titled Coming Up Roses, playing a former musical-comedy actress with two daughters. The movie, produced by Bullet Pictures, Inc. and directed by Lisa Albright is being filmed in March 2010.

In 1982, Peters returned to the New York stage after an eight year absence in one of her few non-musical stage appearances, the off-Broadway Manhattan Theatre Club production of the comedy-drama Sally and Marsha, for which she was nominated for a Drama Desk Award. She then returned to Broadway as Dot/Marie in the Stephen Sondheim–James Lapine musical Sunday in the Park with George (1984), for which she received her third Tony Award nomination, followed by Andrew Lloyd Webber's Song and Dance (1985), winning her first Tony for Best Leading Actress in a Musical for her performance in the role of Emma. Theater critic Frank Rich wrote in an otherwise negative review of the show that Peters "has no peer in the musical theater right now."