Holden won the Academy Award for Best Actor in 1954, and the Emmy Award for Best Actor in 1974. One of the top stars of the 1950s, he was named one of the "Top 10 stars of the year" six times (1954–1958, 1961) and appeared on the American Film Institute's AFI's 100 Years... 100 Stars list as #25.

Holden, eldest of three sons (brothers were Robert and Richard), was born as William Franklin Beedle, Jr. in O'Fallon, Illinois, the son of Mary Blanche (née Ball), a schoolteacher, and William Franklin Beedle, Sr., an industrial chemist. The family, which moved to South Pasadena, California when he was three, was of English descent; Holden's paternal great-grandmother, Rebecca Westfield, was born in England in 1817, while some of his mother's ancestors emigrated in the 17th century to Millenback, Lancaster County, Virginia in the U.S. from England.

After graduating from South Pasadena High School, Holden attended Pasadena Junior College, where he became involved in local radio plays. Contrary to legend and theatre publicity, he did not study at the Pasadena Playhouse, nor was he discovered in a play there. Rather, he was spotted by a talent scout from Paramount Pictures in 1937 while playing the part of an 80-year-old man, Marie Curie's father-in-law, in a play at the Playbox, a separate and private theatre owned by Pasadena Playhouse director Gilmor Brown. His first film role was in Prison Farm the following year.

His first starring role was in Golden Boy (1939), in which he played a violinist turned boxer. That was followed by the role of George Gibbs in the film adaptation of Our Town.

After Columbia Pictures picked up half of his contract, he alternated between starring in several minor pictures for Paramount and Columbia before serving as a 2nd lieutenant in the United States Army Air Forces during World War II, where he acted in training films. Beginning in 1950, his career took off when Billy Wilder tapped him to star as the down-at-the-heels screenwriter Joe Gillis who is taken in by faded silent-screen star Norma Desmond (Gloria Swanson) in Sunset Boulevard, for which Holden earned his first Best Actor Oscar nomination.

Following this breakthrough film, he played a series of roles that combined good looks with cynical detachment, including a prisoner-of-war entrepreneur in Stalag 17 (1953), for which he won the Academy Award for Best Actor, a pressured young engineer/family man in Executive Suite (1954), an acerbic stage director in The Country Girl (1954), a conflicted jet pilot in the Korean War film The Bridges at Toko-Ri (1954), a wandering braggart in Picnic (1955), a dashing war correspondent in Love Is a Many-Splendored Thing (1955), an ill-fated prisoner in The Bridge on the River Kwai (1957) and a WWII tug boat captain in The Key (1958).

He also played a number of sunnier roles in light comedy, such as the handsome architect pursuing virginal Maggie McNamara in the controversial Production Code-breaking The Moon is Blue (1953), as Judy Holliday's tutor in Born Yesterday (1950), as a playwright captivated by Ginger Rogers' character in Forever Female (1953) and as Humphrey Bogart's younger brother, a playboy, in Sabrina (1954), which also starred Audrey Hepburn.

Holden starred in his share of forgettable movies — which he was forced to do by studio contracts — such as Paris When It Sizzles (1964), also co-starring Audrey Hepburn. By the mid-1960s, his roles were having less critical and commercial impact.

In 1969, Holden starred in director Sam Peckinpah's graphically violent Western The Wild Bunch, winning much acclaim. Also in 1969, Holden starred in director Terence Young's family film L'Arbre de Noel, co-starring Italian actress Virna Lisi, based on the novel of the same name by Michel Bataille. This film was originally released in the United States as The Christmas Tree and on home video as When Wolves Cry.

Five years later, he starred with Paul Newman and Steve McQueen in The Towering Inferno. He was also praised for his Oscar-nominated leading performance in Sidney Lumet's Network (1976), playing an older version of the character type he had perfected in the 1950s, only now more jaded and aware of his own mortality. In 1980, Holden appeared in The Earthling with child actor Ricky Schroder, playing a loner dying of cancer who goes to the Australian outback to end his days, meets a young boy whose parents have been killed in an accident, and teaches him how to survive. Schroder later named one of his sons Holden.