She was born Rose Louise Hovick in Seattle, Washington. Gypsy was initially known by her middle name, Louise. Her mother, Rose Thompson, was fifteen when she married John Hovick, who, according to Rose's 1911 birth certificate was an ad salesman with a newspaper. Rose Thompson Hovick was the classic example of a smothering stage mother, though the more horrid details were reportedly whitewashed in Gypsy's memoirs. A second daughter, Ellen Hovick (better known as actress June Havoc) was born in 1916. She too would be known by her middle name, June (although some sources indicate that Ellen Hovick's middle name was "Evangeline"). After Rose T. Hovick divorced her husband John, the girls earned the family's money by appearing in vaudeville where June's talent shone, while Louise remained in the background. At the age of 16, June married a boy in the act named Bobby Reed. Mother Rose had Bobby arrested and met him at the police station carrying a hidden gun. She pulled the trigger, but the safety was on, and Bobby was freed. June left the act and went on to give birth to April Reed.

Louise's singing and dancing talents were insufficient to sustain the act without June. Eventually it became apparent that Louise could earn money in burlesque. Her innovation here was her sense of humor, for while she stripped quite as thoroughly as any burlesque star, she made the crowd laugh. She took the name Gypsy Rose Lee and stripped at Minsky's Burlesque for four years where she was frequently arrested and had relationships with unsavory characters such as Rags Ragland and Eddy Braun. She eventually traveled to Hollywood, where she was billed as Louise Hovick, and married Arnold "Bob" Mizzy on August 25, 1937 at the insistence of the film studio. Her acting was panned. She returned to New York City and invested in Michael Todd (1909-1958). She eventually appeared as an actress in many of his film productions.

In 1941, Gypsy Rose Lee wrote or co-wrote a mystery thriller called The G-String Murders which was made into the 1943 film, Lady of Burlesque. Trying to describe what Gypsy was (a "high-class" stripper), H. L. Mencken coined the term ecdysiast. Her style of intellectual recitation while stripping was spoofed in the number "Zip!" from Rodgers and Hart's Pal Joey, a play in which her sister June appeared. Gypsy can be seen performing an abbreviated version of her act (intellectual recitiation and all) in the 1943 film, Stage Door Canteen. Gypsy's second murder mystery, Mother Finds a Body, was published in 1942.

In love with Michael Todd and in an attempt to make him jealous, Gypsy Lee married William Alexander Kirkland in 1942. They divorced in 1944. While married to Kirkland, she bore a son with Otto Preminger; he was named Erik Lee, and has been known successively as Erik Kirkland, Erik de Diego, and Erik Preminger. Gypsy Lee was married for a third time in 1948 to Julio de Diego, but they eventually divorced.

Gypsy Lee and sister June, who had also become a successful performer, continued to get demands for money from their mother, who had opened a lesbian boardinghouse in a ten-room apartment on West End Avenue in New York City. This property and a farm in Highland Mills, New York, had been rented for Mother Rose by Gypsy Lee. Mother Rose shot and killed one of her guests (according to Erik Preminger, she killed her own lover, who had made a pass at Gypsy) at the boardinghouse. This incident was explained as a suicide. As Mother Rose was dying of colon cancer, her final words, in 1954, were for Gypsy Lee: "Wherever you go... I'll be right there. When you get your own private kick in the ass, just remember: it's a present from me to you."

With their mother dead, the sisters now felt free to write about her without risking a lawsuit. Gypsy's memoirs, titled Gypsy, were published in 1957, and were taken as inspirational material for the Jule Styne, Stephen Sondheim, and Arthur Laurents musical Gypsy: A Musical Fable. Sister June did not like the way she was portrayed in the piece, but was eventually persuaded not to oppose it for her sister's sake. The play and the subsequent movie deal assured Gypsy a steady income. The sisters became estranged.

Gypsy Rose Lee went on to host a television talk show, Gypsy. A smoker, she was diagnosed in 1969 with metastatic lung cancer, which prompted Gypsy to reconcile with sister June Havoc before her death. "This is my present, you know," she told June. "My present from Mother."

The walls of her Los Angeles home were adorned with pictures by Joan Miro, Pablo Picasso, Marc Chagall, Max Ernst, and Dorothea Tanning, all of which were reportedly gifts to her by the artists themselves.