Dahl was born in Minneapolis, Minnesota and is of Norwegian descent. After graduating from high school in 1946, she held various jobs, including working as a model for a brief period. She began her acting career in 1947, at the age of 19. Her acting career gradually picked up steam, and she reached the peak of her popularity and success in the 1950s. Some of her best films include: Reign of Terror (1949), Three Little Words (1950), Woman's World (1954), Slightly Scarlet (1956), and Journey to the Center of the Earth (1959).

Dahl met actor Lex Barker in the early 1950s, and in 1952, Dahl and Barker wed. A few years later she and Barker divorced, and Dahl would go on to marry another matinee idol, Fernando Lamas. In 1958 Dahl and Lamas had their only son, Lorenzo Lamas (who also grew up to become an actor). Shortly after giving birth to her son, Dahl slowed and eventually ended her career as an actress, although she still appeared in movies and on television occasionally. Dahl would go on to work as a beauty columnist and as a writer. She also founded her own business, Arlene Dahl Enterprises, which marketed lingerie and cosmetics.

Dahl and Lamas divorced in 1960, and Dahl later remarried. She has had two children from other marriages.

The last movie she appeared in was the 1991 film Night of the Warrior, starring her son, Lorenzo. Before that, the last movie she had appeared in had been in the 1960s.

Dahl had a relationship with John F. Kennedy before both she and Kennedy were married.

She posed seminude for Playboy magazine in December 1962.