Peter Dinklage was born in Morristown, New Jersey, the son of Diane, an elementary school music teacher, and John Dinklage, a retired insurance salesman. He grew up in Mendham Borough, New Jersey. Dinklage is a 1987 graduate of Delbarton School, where he first began acting, and a 1991 graduate of Bennington College, Bennington, Vermont.

Dinklage was born with achondroplasia, causing dwarfism. His height is 4'5" (1.35 m). When asked about this, he said: “When I was younger, definitely, I let it get to me. As an adolescent, I was bitter and angry and I definitely put up these walls. But the older you get, you realize you just have to have a sense of humor. You just know that it's not your problem. It's theirs.”

The 2003's award winning film The Station Agent was a breakout role for Dinklage, and his first mainstream movie. He received Independent Spirit and Screen Actors Guild Award nominations for Best Actor for his performance in that film. Before The Station Agent, Dinklage appeared in 1995's arthouse hit Living in Oblivion, his debut film. Dinklage has starred multiple times in off-Broadway productions as well, where height is less of an issue than in Hollywood.

In Elf, Dinklage played a pretentious children's author who beats up Will Ferrell's character after he is unintentionally insulted. In 2005, Dinklage starred in the short-lived CBS science fiction series Threshold and appeared in the Michael Showalter comedy The Baxter as a "flamboyant" wedding planner. In 2006 Dinklage appeared in Sidney Lumet's latest courtroom drama, Find Me Guilty (2006), opposite Vin Diesel, and in episodes of Nip/Tuck. He also made a cameo appearance on the HBO television series Entourage.

Dinklage was chosen by director Andrew Adamson for the role of Trumpkin in the 2008 film The Chronicles of Narnia: Prince Caspian. Comic book writer (and incoming Wonder Woman writer) Gail Simone has cited Dinklage as the perfect choice to play the evil Dr. Psycho in a possible Wonder Woman film.