Hamilton was born in Salisbury, Maryland. Hamilton's father, Carroll Stanford Hamilton, a physician, died when she was five, and her mother later married a police chief. Hamilton has an identical twin sister (Leslie Hamilton Gearren), one older sister and one younger brother. She has said that she was raised in a "very boring, white Anglo-Saxon" family, and “voraciously read books” during her spare time. Hamilton went to Wicomico Junior High (now Wicomico Middle School) and Wicomico High School in Salisbury, with Leslie, her twin. She studied for two years at Washington College in Chestertown, Maryland, before moving on to acting studies in New York City. Hamilton has said that her acting professor at Washington College told her she had no hope of earning a living as an actress. In New York, she attended acting workshops given by Lee Strasberg.
Hamilton's acting debut came first on television, followed by a major role as Lisa Rogers in the prime-time soap opera Secrets of Midland Heights (December 1980/January 1981). Her big-screen debut was in the thriller TAG: The Assassination Game (1982) and as a result, she was listed as one of twelve "Promising New Actors of 1982" in John Willis' Screen World, Vol. 34. She also shared a starring role in the CBS made-for-TV movie Country Gold, with Loni Anderson and Earl Holliman.
Hamilton played the lead role in Children of the Corn, based on the horror short story by Stephen King. The movie, which made $14 million at the box office, was panned by critics. Hamilton's next role was in The Terminator, opposite Michael Biehn, in 1984. The movie was an unexpectedly huge commercial and critical success. Following The Terminator, Hamilton starred in Black Moon Rising, an action thriller with Tommy Lee Jones. She then returned to television as a guest-star in the mystery series Murder, She Wrote, scoring favorable reviews. Hamilton next starred opposite Ron Perlman in the TV series Beauty and the Beast. The series was critically acclaimed, and she received Emmy and Golden Globe nominations. Hamilton left the series in 1989 and it ended in 1990.
Hamilton returned to the big screen in 1990 with Michael Caine in Mr. Destiny and in 1991 with Terminator 2: Judgment Day, the sequel to The Terminator. The latter was a smash at the box office, grossing over $500 million, more than any other film of that year. Hamilton underwent intense physical training to emphasize the character's transformation from the first film. Her identical twin sister was Linda's double in Terminator 2. Hamilton received two MTV Movie Awards for her role in the film, one for Best Female Performance and the other for Most Desirable Female. She reprised the character, Sarah Connor, for the theme park attraction T2 3-D. In 1990, Hamilton was chosen by People Magazine as one of the 50 Most Beautiful People in the world. Following the success of the Terminator series, she hosted Saturday Night Live.
She returned to television in A Mother's Prayer (1995) playing a mother who lost her husband and is diagnosed with AIDS. For her performance in the film, which co-starred Kate Nelligan and Bruce Dern, Hamilton was awarded a CableACE Award for best dramatic performance and nominated for another Golden Globe in 1996. That same year, Hamilton filmed two motion pictures that were released one week apart in 1997: Shadow Conspiracy with Charlie Sheen and Dante's Peak with Pierce Brosnan. Shadow Conspiracy flopped at the box office, but Dante's Peak grossed $180 million and was one of the biggest commercial hits of the year. She received a Blockbuster Entertainment Award for female performance in Dante's Peak.
Hamilton has since appeared on the television shows Frasier (season 4 episode "Odd Man Out" as Laura) and According to Jim and has done more TV movies, including On the Line, Robots Rising, Rescuers: Stories of Courage: Two Couples, Point Last Seen, and The Color of Courage. Hamilton and her Beauty and the Beast costar Ron Perlman reunited in the 2005 post-Vietnam war drama Missing in America.
In 2009, she returned as Sarah Connor in Terminator Salvation, in voice-overs only. In 2010, she joined the cast of Chuck in the recurring guest role of Mary Elizabeth Bartowski, a CIA agent and long-missing mother of Chuck and Ellie. She also appears as a guest star in the Showtime cable television show Weeds as the marijuana supplier for the show's main character (Mary-Louise Parker). In November 2011, she narrated the Chiller The Future of Fear horror documentary.
More recently, Hamilton has had a prominent guest role on Lost Girl and a prominent recurring guest role on Defiance.
Hamilton has been married and divorced three times. Her first marriage, from 1979 to 1980, was to Peter Horton. Her second marriage, from 1982 to 1989, was to Bruce Abbott, who left her when she was pregnant with their son Dalton. In 1991, she moved in with film director James Cameron following his divorce from Kathryn Bigelow. They had a daughter, Josephine, born on February 15, 1993. She and Cameron married in 1997; but the marriage was short-lived, ending in a $50 million divorce settlement in 1999.
Hamilton has described herself politically as a Democrat, but she voted for Republican candidate Arnold Schwarzenegger, her Terminator co-star, in the 2003 California gubernatorial election after his campaign convinced her he was suitable for the job.
In an October 2005 appearance on Larry King Live, Hamilton told the audience that she has bipolar disorder, which she said destroyed her marriage to Abbott, whom she admitted having abused verbally and physically, and eventually sought treatment.
While filming Terminator 2: Judgment Day, Hamilton suffered permanent hearing damage in one ear when she fired a gun inside an elevator without using her ear plugs.