Ladd was born Rose Diane Ladner in Meridian, Mississippi to Mary Bernadette Anderson and Preston Paul Ladner, a poulterer. She is a distant relation of the playwright Tennessee Williams (born Thomas Lanier Williams) on her father's side. Ladd was raised in the Catholic religion.

Ladd had a supporting role in Roman Polanski's 1974 film Chinatown, and was nominated for an Academy Award for Best Actress in a Supporting Role for her role as Flo in the film Alice Doesn't Live Here Anymore. That film inspired the TV series Alice, in which Flo was portrayed by Polly Holliday. When Holliday left the TV series, Ladd succeeded her as waitress Isabelle "Belle" Dupree. Ladd left the series abruptly due to her strained relations with the series' star, Linda Lavin.

In 2004, Ladd played psychic Mrs. Druse in Stephen King's miniseries Kingdom Hospital. In April 2006, Diane Ladd released her first book entitled: Spiraling Through The School Of Life : A Mental, Physical, and Spiritual Discovery.

In addition to her Academy Award nomination for Alice Doesn't Live Here Anymore, she was also nominated (again in the Best Actress in a Supporting Role category) for both Wild at Heart and Rambling Rose.

Ladd was formerly married to actor and one-time co-star, Bruce Dern; the couple had two children, of whom only actress Laura Dern survives. Ladd and Laura Dern co-starred in the films Wild at Heart and Rambling Rose. Ladd is now married to Robert Charles Hunter.