Petersen was born in Evanston, Illinois of Danish ancestry. He graduated from Bishop Kelly High School in Boise, Idaho, in 1972. He was accepted to Idaho State University on a football scholarship. While at Idaho State, Petersen took an acting course which changed the direction of his life. He left school along with his wife, Joanne, in 1974 and followed a drama professor to Spain where he studied as a Shakespearean actor. Petersen returned to Idaho with the intent of being an actor. Not wanting to work in a non-acting job in Idaho, he returned home to the Chicago area, living with relatives. He became active there in theater and earned his Actors' Equity card. He performed with the Steppenwolf Theatre Company and was a co-founder of the Remains Theater Ensemble which also included other prominent Chicago actors Gary Cole and Ted Levine.

Petersen married longtime girlfriend Gina Cirone in June 2003. He has a daughter named Maite, from his previous marriage, who gave birth to a child, named Mazrik William, born October 2003. Petersen is an avid Chicago Cubs fan, and will drop by Wrigley Field at least once a year to sing the seventh inning stretch.

In his movies, he is usually credited without his middle initial (i.e. credited as "William Petersen" and not "William L. Petersen").

Because his role in Manhunter was so emotionally exhausting, he did everything he could to rid himself of Will Graham after finishing principal photography. He shaved off his beard, cut his hair and dyed it blonde. He also claims to have done this because, while rehearsing for a play in Chicago, his dialogue was always coming out Will Graham; he dyed his hair so he could look in the mirror and see a different person. In a move perhaps indicative of his career choices, Petersen declined a part in Oliver Stone's Platoon, as it would have kept him in the Philippines, away from his family. Instead, he worked on the 1987 made-for-TV movie Long Gone.

Petersen was offered the role of Henry Hill in the movie Goodfellas, but turned it down.

In 1993, Petersen appeared in the mini series "Return to Lonesome Dove," and in 1996, appeared in Fear. Both projects featured him as a character with the surname "Walker."

In the 2000 release The Contender, Petersen played the role of Governor Jack Hathway, an unscrupulous candidate for Vice President following the death of the incumbent. He also appeared uncredited in the noir thriller Mulholland Falls as a character who finds himself on the violent receiving end of Los Angeles cops.

Since 2000, Petersen has gained his greatest fame starring as Dr. Gil Grissom in the CBS crime drama CSI: Crime Scene Investigation. Petersen recently took a break from CSI to appear in a five week run of the Trinity Repertory Company production of Dublin Carol in Providence, Rhode Island.