An illegitimate son of the great actor-producer Sir Herbert Beerbohm Tree and his mistress, May Pinney Reed, Carol Reed was born in Putney, London, and educated at The King's School, Canterbury.

Reed served in the British Army during the Second World War, giving him many experiences which appeared in his later films. He worked as a director for the Army Kinematograph Service and directed the acclaimed propaganda feature, The Way Ahead (1944), starring David Niven. He also co-directed, with Garson Kanin, The True Glory (1945), an Oscar-winning documentary compiled from footage shot by Allied army cameramen.

Reed hit his peak in the post-war years with a string of features which remain landmarks in English film history. These began with Odd Man Out (1947), a superb hunt drama which follows a wounded Irish revolutionary (James Mason) through the final encounters of his life. The success of Odd Man Out led to a contract with Alexander Korda, for whom Reed made five films, beginning with The Fallen Idol (1949). A superbly crafted thriller which turns on a child's misconception of adult emotional entanglements, it was followed in 1950 by the director's acknowledged masterpiece, The Third Man. Justly regarded as the finest of the many films to have been adapted from the works of Graham Greene, this atmospheric thriller made superb use of its postwar Viennese locations and featured fine performances from Joseph Cotten, Trevor Howard and Orson Welles.

After Outcast of the Islands (1951), Reed found his critical reputation taking a somewhat downward turn in the 1950s and early 60s, when he turned out a number of more expensive, but less meticulously crafted productions such as the Hollywood-made Trapeze (1958) and The Agony and the Ecstasy (1965). (He had quit the remake of Mutiny on the Bounty in 1962, appalled by the overpowering ego of Marlon Brando; unbeknownst to Reed, the studio had given complete artistic control to Brando for the film.) His fortunes revived with Oliver! (1968), an exuberant musical version of Dickens's Oliver Twist which won six Academy Awards, including Best Picture and Best Director.

From 1943 until 1947, he was married to the elegant British film star Diana Wynyard. After their divorce, he married, in 1948, the actress Penelope Dudley Ward, the elder daughter of Freda Dudley Ward, who had been a mistress of the Prince of Wales, later Edward VIII of the United Kingdom and Duke of Windsor. They had one son, Max, and a nephew was the actor Oliver Reed. Penelope Dudley Ward's daughter (Caerol Reed's stepdaughter) was Tracy Reed, who acted in numerous films, notably as the only woman in Dr. Strangelove. Reed also had a reputation as a bit of a ladies' man; some of his more famous lovers were Dame Daphne du Maurier and Jessie Matthews.

In 1953 he became the first British film director to be knighted for his craft.

Carol Reed died from a heart attack on 25 April 1976 at his home in Chelsea, London at the age of 69.