Peyroux's family was in academia. When Peyroux was six, her father moved the family to Brooklyn so he could pursue a career in acting. She grew up in New York City and southern California; when her parents divorced, she moved with her mother to Paris at age 13. In several interviews, Peyroux described her parents as "hippies" and classifies them as "eccentric educators", which helped her to pursue a career in music. She has stated that her father would "listen to old records all the time" and her mother had a ukulele that she learned how to play while she was still a child.

Peyroux started singing at the age of fifteen, when she discovered street musicians in the Latin Quarter in Paris. She joined a group called the Riverboat Shufflers, first by passing around the hat, and then by singing. At sixteen she joined The Lost Wandering Blues and Jazz Band and spent a number of years touring Europe performing jazz standards.

Her experiences provided the basis for her first album, Dreamland. The album was released in 1996 by Atlantic Records, and gained widespread attention. It featured a cover of Patsy Cline's "Walkin' After Midnight", Édith Piaf's signature-song "La Vie en rose" and two Bessie Smith covers, among others. This first record resulted in her being referred to as the 21st century Billie Holiday, particularly owing to a "Getting Some Fun Out of Life" cover and to "Hey Sweet Man", an original song with a style highly reminiscent of Holiday. Time called it "the most exciting, involving vocal performance by a new singer this year". Peyroux began opening for artists such as Sarah McLachlan and Cesária Évora, and made appearances at jazz festivals and on the Lilith Fair tour. In 1997, she made an appearance at the Montreal Jazz Festival, where she performed with some guest artists, including James Carter. In this concert, Madeleine performed some standards like "I Wish I Could Shimmy Like My Sister Kate", a cover included on Montreal's 30-years Best Of.

When Peyroux was scheduled to start recording again, she was diagnosed with a health problem on her vocal cords. By this time, she also had some disagreement with her record company, which led to a significant amount of time out of the spotlight and without recording.

Peyroux spent much of the next six years busking in Paris, performing occasionally in clubs in the U.S., and generally living a low-key existence. She continued to contribute to works by other artists, but rarely appeared in clubs under her own name. In 1997, she covered the song "Life is Fine" to a Rainer Ptácek tribute.

In May 2002 she joined multi-instrumentalist William Galison, and together they appeared at such venues as the Bottom Line, Joe's Pub, and the Tin Angel. In 2003 the duo released a seven-song EP entitled Got You on My Mind, which they sold at shows and online. However, in 2003, their relationship ended. At the time, Peyroux was in negotiations with Rounder Records and showed the EP as demo. Although Peyroux claims she told the record company it was co-written with William Galison, this has resulted in an ongoing lawsuit.

Got You on My Mind was re-released by Galison in August 2004; the original EP was expanded by the addition of four tracks by Galison.

After signing up for Rounder, Peyroux was teamed with well-known record producer Larry Klein. In September 2004, she released her second solo album, Careless Love, to generally positive reviews. It went on to sell over a million copies worldwide and took her out of anonymity. The album opens with one of her best-known songs, a cover of Leonard Cohen's, "Dance Me to the End of Love", also featuring covers of Bob Dylan ("You're Gonna Make Me Lonesome When You Go"), Elliott Smith("Between The Bars"), and Hank Williams("Weary Blues"), among others. As usual, the album also contained a French track, "J'ai Deux Amours", and the only original track on the album was "Don't Wait Too Long" (in collaboration with Jesse Harris and Larry Klein). The songs she covered were mostly from the first half of the 20th century but her choices showed, according to several reviews, "impeccable taste".

Her third solo album, Half the Perfect World, was released on September 12, 2006. On this album, she sounds more like a chanteuse and not just a Jazz/Blues singer. She collaborated with several artists, including Jesse Harris, Walter Becker, Larry Klein (who also produced the album), and k.d. lang, with whom Peyroux performed a cover of the Joni Mitchellsong "River". Once again, the songs were carefully chosen, and she sang covers of more contemporary artists. Notable covers include "Blue Alert" and "Half the Perfect World" by Leonard Cohen/Anjani Thomas; "Smile" by Charlie Chaplin John Turner and Geoffrey Parsons; a rendition of Serge Gainsbourg's "La Javanaise" and Tom Waits' "(Looking for) the Heartof Saturday Night". Unlike her previous album, Half the Perfect World had four original tracks.

On September 3, 2006, Peyroux performed a live session for Live from Abbey Road at Abbey Road Studios. She shared her episode with the Red Hot Chili Peppers and Snow Patrol; it was aired in the UK on Channel 4 and in the USA on the Sundance Channel. On July 12, 2007, she was awarded Best International Jazz Artist at the BBC Jazz Awards.

Her fourth solo album, a turning point in Peyroux's career, with all original tracks, Bare Bones, was released on March 10, 2009. The album was produced by Larry Klein. She collaborated with songwriters Walter Becker, Joe Henry, David Batteau and Julian Coryell. The album featured a sole Peyroux-penned composition, "I Must Be Saved" and its first single was "You Can't Do Me", a song with a soul-rock beat, a whole new style for the vocalist. The album received mostly favorable reviews and the lyrics were praised.

After its release, the singer went on a tour, performing in the US, Canada, South America, Europe and Asia.

In 2008, Peyroux collaborated with Phil Roy on his third album, The Great Longing, as a duo on the track "Exceptionally Ordinary". Madeleine Peyroux also covered "In the Wee Small Hours of the Morning" from the Still Breathing soundtrack.

Peyroux is represented by American International Artists, a management group whose other artists include James Carter and Sarah Pedinotti.

Peyroux eschews publicity and keeps a low profile. She has dropped "out of sight" for extended periods of time, as when she spent several years busking after the release of her first record.

Peyroux is an American of French descent; she sings on occasion in French but the majority of her songs are in English.

The ballad "Don't Wait Too Long" was featured in an American national television ad campaign for Dockers San Francisco brand apparel. A clip of her recording of "Blue Alert" was used in an Old Navy jeans advertisement in 2007.