Scarwid was born in Savannah, Georgia, the daughter of Elizabeth (née Frizelle (1920–2006) and Anthony John Scarwid (1911–1989). She has three brothers. Her family are long-time residents of Tybee Island, Georgia. Diana left Georgia at the age of 17, heading to New York to become an actress. She graduated from The American Academy of Dramatic Arts and Pace University simultaneously, completing the dual program as an honor student. After landing bit-parts in TV series, made-for-TV films, and a few motion pictures, she married Eric Scheinbart, a physician, on August 27, 1978, with whom she has two children.
Scarwid's first performance of the 1980s was as Sheila Langtree, one of many characters in Guyana Tragedy: The Story of Jim Jones (1980), the television miniseries about the People's Temple led by Jim Jones and their 1978 mass suicide at Jonestown. Following that was the supporting role of Jeanne in the romantic drama film Honeysuckle Rose (1980). Scarwid landed her breakthrough role in Inside Moves; her performance as a besotted waitress in Inside Moves garnered her an Academy Award nomination for Best Supporting Actress. The following year she portrayed the adult Christina Crawford, the abused adopted daughter of Hollywood legend Joan Crawford in the 1981 film Mommie Dearest. Her performance earned her a Razzie Award for Worst Supporting Actress.
Scarwid's next roles were as a nurturing guidance counselor in the made-for-TV film Desperate Lives (1982); an abducted woman in the 1983 science-fiction film Strange Invaders; a heroin-abusing student teacher in Rumble Fish (1983); a lesbian funeral parlor-beautician in Silkwood, the 1983 autobiographical film depicting the turn of events which led up to the disappearance of Karen Silkwood; a rape victim in the revenge film The Ladies Club; a suicidal nun in Psycho III (1986), the second sequel to Alfred Hitchcock's Psycho and the third film in the Psycho series; and Farrah Fawcett's character's roommate in the 1986 film adaptation of William Mastrosimone's 1982 play Extremities. Finishing off the decade, Scarwid assumed roles as a casino dealer in the Burt Reynolds film Heat; Mark Harmon's character's wife in the made-for-TV film After the Promise (1987); and a lacquered reporter in Brenda Starr, the adventure film based on Dale Messick's comic strip of the same name.
Scarwid started off the decade with the role of Willa Harper in Night of the Hunter (1991), the made-for-TV remake of the 1955 film; the role was originated by Shelley Winters. Scarwid's next role was the portrayal of Rose Kennedy in JFK: Reckless Youth, American Broadcasting Company's miniseries interpretation of Nigel Hamilton's novel of the same name. In 1995, she played a bigoted and neglectful mother who forbids her son to associate with a boy who has AIDS in the comedy-drama film The Cure; the same year she starred as Sarah, a mother of an impoverished family in the film The Neon Bible opposite Denis Leary. She portrayed Bess Truman in HBO's Truman (1995), an interpretation of David McCullough's Pulitzer Prize-winning book Truman. Finishing off the year, Scarwid played an alcoholic mother in the drama film Gold Diggers: The Secret of Bear Mountain. Some time that year, she and Scheinbart divorced.
In 1996, Scarwid played an alien-friendly first wife in Trial By Fire, an episode of The Outer Limits; a protective aunt of a girl who is being molested by her stepfather in Bastard Out of Carolina, Anjelica Huston's interpretation of Dorothy Allison's novel; an abortion clinic nurse in the made-for-TV film If These Walls Could Talk; an avid supporter of a small town abortion clinic in the made-for-TV film Critical Choices; and Robert Ulrich's character's wife in the made-for-TV film The Angel of Pennsylvania Avenue.
Roles that followed: a mysterious woman harboring a dark secret in The X-Files– Episode: "Kitsunegari"; portrayals of a bigoted principal's assistant in the made-for-TV film Ruby Bridges (1998), Buzz Aldrin's wife in HBO's twelve-part miniseries From the Earth to the Moon (1998), and Crystal Eastman, the lawyer, antimilitarist, feminist, socialist, journalist, and women's suffrage pioneer in the miniseries A Will of Their Own (1998). The following year, Scarwid starred opposite Meredith Baxter in the true-story thriller made-for-TV film Down Will Come Baby, in which she played the deceitful Dorothy (Gretchen) McIntyre.
Scarwid started the new century with the portrayal of Dianne Barrie, Cincinnati Contemporary Arts Center director Dennis Barrie's wife in Showtime's made-for-TV film Dirty Pictures (2000). The same year, she appeared as Michelle Pfeiffer's character's kooky friend in Robert Zemeckis's supernatural horror drama film What Lies Beneath. In 2001 she guest-starred in Law & Order as a fingerprint analyst accused of manslaughter, and in 2003 she appeared as Selma Blair's character's prying mother in the romantic comedy film A Guy Thing. The same year, she portrayed Elke Alig, Michael Alig's enabling and neglectful mother in Party Monster, the film adaptation of James St. James's memoir Disco Bloodbath. The following year, she starred as Karen Tyler, a smothering mother in FOX Nextwork's TV comedy-drama television series Wonderfalls; the series only lasted one season, 14 episodes. She returned to the Law and Order franchise with an appearance as a mother on the warpath after finding out her son is a victim of pedophilia in Law & Order: Special Victims Unit - Episode: "Head".
In the mid 2000s, she played Miss Johnson, a bold and seductive apartment complex manager, in Teddy Sharkova's romance film Read Thread (2005); a poetry-loving housewife in Tim Boxell's drama film Valley of the Heart's Delight (2006); and Trevor Morgan's character's supportive mother in George Gallo's drama film Local Color (2006). The same year, she guest-starred as Jeanette Owens in Fox Networks' serial drama Prison Break, following which she assumed the role of Isabel, a mysterious sheriff and island inhabitant in ABC's action-adventure TV series Lost. Consecutively, she assumed roles in episodes of other TV series: a violently racist mother in CBS's police procedural Cold Case, an extremely quirky Mother Superior in ABC's comedy-drama Pushing Daisies, and a supernatural woman with the ability to manipulate the weather to her will in NBC's science fiction drama Heroes. Nearing the end of the decade, she resumed taking roles on the small screen with performances in the A&E television series The Cleaner (2009) and CBS's police procedural series Criminal Minds (2009).
Scarwid appeared in the made-for-TV film Backyard Wedding (2010) and Sam Levinson's black-comedy Another Happy Day (2011).