She was born in Boston, Massachusetts, and began singing as a child. She moved to New York and landed a job as a featured nightclub performer. She became a lounge singer, mingling song with ad-libbed comedy, and was featured on television on "The Perry Como Show" and "The Ed Sullivan Show".

She made her stage debut in 1962 in The World of Jules Feiffer, a Jules Feiffer play directed by Mike Nichols, with music by Stephen Sondheim. She made her Broadway debut in "Nowhere to Go But Up" which ran only two weeks but earned her outstanding reviews. She appeared in a series of commercial failures (The Fig Leaves Are Falling ran for four performances) which nonetheless garnered her favorable reviews and a nomination for a Tony Award in 1969. She looked back on these with typical humor, once answering the comment "Miss Loudon, I saw you in Comedy Tonight with the response, "Oh, you poor thing! I feel so bad for you!"

She married Norman Paris, a composer who arranged the music for Sondheim's television musical Evening Primrose, and who wrote the theme song for the television game show I've Got a Secret.

Her best-remembered role is as evil orphanage administrator "Miss Hannigan" in Annie, for which she won the Tony Award for Best Actress in 1977.

She was widowed in 1977, and appeared as a recently widowed woman in Ballroom in 1979. Her performance of the song "Fifty Percent" from Ballroom on the Tony Awards was one of a series of triumphant performances on the yearly awards show, which included an outrageous version of "Broadway Baby" from Follies. Her version of George Gershwin's "Vodka" had her throwing off a luxurious fur, (telling it to "wait in the car") to reveal a spectacular sleek blue sequined costume, adding "I am too good for this room. I am too good for this song! I am, however, not too good for this dress."

Her television series, Dorothy, in 1979, had her portraying a former showgirl teaching music and drama at a stuffy girls' school. It only lasted one season.

She took over as Mrs. Lovett in Stephen Sondheim's Sweeney Todd from Angela Lansbury(She was reviewed as being stellar enough to have originated the role), and co-starred with Katharine Hepburn and Julia Barrin the Broadway play West Side Waltz in 1981. In 1982 she won the Sarah Siddons Award for her work in Chicago theatre.

Her (non-musical) performance as a washed-up television comedienne in 1983's Noises Off received rave reviews, but the role was played in the movie by Carol Burnett (who also got Loudon's role in the OK 1982 film version of Annie).

She appeared in two films, playing an agent in the film Garbo Talks (starring Anne Bancroft) and a Southern eccentric in Midnight in the Garden of Good and Evil.

She died in New York City of cancer at the age of 70, and was interred in Kensico Cemetery in Valhalla, Westchester County, New York. She left no survivors.