Born in New York City, Holm was an only child. Her mother, Jean Parke, was an American portrait artist and author, while her father, Theodor Holm, was a Norwegian insurance adjuster for Lloyd's of London. Holm studied acting at the University of Chicago before becoming a stage actress in the late 1930s.

Her first professional theatrical role was in a production of Hamlet starring Leslie Howard, and Holm quickly rose to prominence with her portrayal of "Ado Annie" in the original Broadway production of Oklahoma! in 1943. After starring in the Broadway production of Bloomer Girl, 20th Century Fox signed Holm to a movie contract in 1946, and in her first two years as a film actress Holm cemented herself immediately as a formidable performer, especially when winning her Academy Award and Golden Globe for best supporting actress in Gentleman's Agreement. After her famous performance in All About Eve, however, Holm realized she preferred working in live theater than on movie sets, and took on very few filmed roles over the following decade. The most successful of these was in the 1956 musical, High Society, in which she duetted with Frank Sinatra. In the 1970s and 1980s, Holm returned more fully to screen acting, with roles in films such as Three Men and a Baby and in television series (often as a guest star) such as Columbo and Falcon Crest. Celeste Holm has received many honors in her lifetime: the 1968 Sarah Siddons Award for distinguished achievement in Chicago theatre, she was appointed to the National Arts Council by then-President Ronald Reagan, knighted by King Olav of Norway, and inducted into the American Theatre Hall of Fame in 1992. She remains active for social causes as a spokesperson for UNICEF, and for occasional professional engagements. On April 29, 2004, on her 85th birthday, she married the 41 year-old opera singer, Frank Basile.