Lange, the third of four children, was born in Cloquet, Minnesota, the daughter of Dorothy Florence (née Sahlman) and Albert John Lange, who was a teacher and salesman. Her maternal grandparents were of Finnish descent, while her paternal grandparents were German and Dutch. She studied art briefly at the University of Minnesota before going to Paris where she studied mime with Étienne Decroux. She returned to New York City in 1973 and took acting lessons while working as a waitress and a fashion model for the Wilhelmina modeling agency.

In 1976, Dino De Laurentiis cast her in his motion picture remake King Kong, which started and almost ended her career. Although the King Kong remake was a top moneymaker for Paramount Pictures, critics were not kind to the film. The unfavorable reviews were devastating but critics took notice with her impressive turn in Bob Rafelson's remake of The Postman Always Rings Twice (1981).

Her performance in her next film, Frances (1982), in which she portrayed actress Frances Farmer, was highly lauded and earned her a nomination for Academy Award for Best Actress. She received two nominations that year, the other as Supporting Actress in the comedy Tootsie (1982), for which she won. She continued giving impressive performances through the 80s and 90s in films such as Sweet Dreams (1984) (playing country/western singer Patsy Cline), Music Box (1989), Men Don't Leave (1990), and Blue Sky (1994) for which she won the Best Actress Academy Award.

In 1992, Lange made her Broadway debut opposite Alec Baldwinin Tennessee Williams' A Streetcar Named Desire. In 2000, she appeared on the London stage as Mary Tyrone in Eugene O'Neill's Long Day's Journey Into Night. In 2005, she returned to Broadway in another Tennessee Williams' play, The Glass Menagerie with actor Christian Slater.

Lange was married to photographer Paco Grande from 1970-1981. Since 1982, she has lived with playwright/actor Sam Shepard. She has three children, Alexandra (born 1981) with dancer/actor Mikhail Baryshnikov, and Hannah Jane (born 1985) and Walker Samuel (born 1987) with Shepard. Lange currently lives in New York City. Lange is a goodwill ambassador for UNICEF. She has also been a public critic of President George W. Bush, once calling his administration, "a self-serving regime of deceit, hypocrisy and belligerence".