Walter was born in Brooklyn, New York, the daughter of Esther (née Groisser) and David Walter, a musician who was a member of the NBC Symphony Orchestra and the NYC Ballet Orchestra. She attended New York City's High School of Performing Arts. Her family is Jewish. Her brother is screenwriter Richard Walter.
Walter began her acting career on the stage. She won the Clarence Derwent Award in 1963 for Outstanding Debut Broadway Performance in Photo Finish by Peter Ustinov. She soon moved to television, and she the character Julie Murano on the television series, Love of Life. While appearing on Love of Life from 1962 to 1965, she also acted in many other popular television series, including Naked City, East Side/West Side, Ben Casey, Route 66, Lilith, The Doctors and the Nurses, The Rogues, and The Defenders. Amongst those series is Walter's notable role as Lorna Richmond on "The Ordeal of Mrs. Snow" episode of The Alfred Hitchcock Hour which aired in April 14, 1964; and a supporting role as William Shatner's wife in the 1965 series For The People.
Walter appeared in the first episode of Flipper, shown in September 1964. Also in 1964, she guest starred in the episode "How Much for a Prince?" of CBS's short-lived drama The Reporter. In 1966 she appeared in an episode of The Fugitive entitled "The White Knight".
Her earliest notable film role was in the 1971 movie Play Misty for Me, in which she played a young woman with behavior consistent with borderline personality disorder who becomes infatuated with and ultimately stalks a disc jockey. For her performance, Walter received a Golden Globe nomination in the Best Motion Picture Actress – Drama category and critical praise, with Roger Ebert describing Walter as demonstrating "unnerving effectiveness" in the role. Walter's other film credits from that era include Lilith (1964), Grand Prix (1966), The Group (1966), Bye Bye Braverman (1968), and Number One (1969).
In 1974, Walter co-starred an episode of Columbo, "Mind Over Mayhem". She starred in the short-lived series Amy Prentiss, a spinoff of Ironside and had a recurring role on Trapper John, M.D. as Melanie McIntyre, Trapper John's former wife. In 1983, she had a role in the short-lived NBC primetime soap opera Bare Essence as Ava Marshall. Since then, she has worked most frequently in television and theater, though she did appear in some films including The Flamingo Kid in 1984 and the 1994 film PCU. In the 1990s, she voiced Fran Sinclair on the ABC comedy Dinosaurs, and appeared on Just Shoot Me! as Eve Gallo, the mother of Maya and the ex-wife of magazine publisher Jack Gallo.
From 2003 to 2006, she appeared in a regular role as the scheming alcoholic socialite matriarch Lucille Bluth on Fox's critically acclaimed comedy series Arrested Development. In 2005, she received an Emmy nomination for Outstanding Supporting Actress in a Comedy Series for the role. Despite her convincing portrayal of Lucille, she states: "I'm nothing like Lucille. Nothing. My daughter will tell you. I'm really a very nice, boring person." Despite acclaim from critics, Arrested Development received low ratings and viewership on Fox, which canceled the series in 2006. It was revived by Netflix for season 4 in 2013 where it gained huge popularity. Talks of a season 5 are in place and Walter said she would love to come back as it was important to her for her career.
Walter played Tabitha Wilson on the first season of 90210, until the character was written off halfway through the season. She also guest starred on the sitcom Rules of Engagement in the episode titled "Kids". She guest starred in an episode of Law & Order: SVU in 2009, and appeared again later on as legal-aid lawyer Petra Gilmartin.
Walter recently starred as Evangeline Harcourt in the Broadway revival of Anything Goes, which began previews in March 2011 and officially opened on April 7, 2011.
She currently voices spymistress Malory Archer on the FX animated show Archer. She was drawn to the role after learning that the script for the pilot explicitly drew comparisons between Malory and Lucille Bluth.
Since 1983, Walter has been married to actor Ron Leibman, with whom she co-starred in Neil Simon's play Rumors. They also appeared together as husband and wife in the film Dummy and in Law & Order (in the episode "House Counsel") and he joined the cast of Archer, voicing her character's new husband. She describes herself as not religious but "very Jewish in my heart".
Walter has a daughter, Brooke Bowman, who was born in 1972 and is currently an executive for 21st Century Fox Television, from her 12-year marriage to Ross Bowman, a former Broadway stage manager and television director.