Born in Göttingen, Germany, her family emigrated to the United States during her early childhood. She was raised in Madison, Wisconsin. She studied acting at the Royal Academy of Dramatic Arts.

Primarily noted for stage roles, Hagen was a two-time winner of a Tony Award for Best Performance by a Leading Actress in a Play, first in 1951 for her performance in The Country Girl and again in 1963 for Who's Afraid of Virginia Woolf?. In 1981 she was elected to the American Theatre Hall of Fame and in 1999 received a "Special Lifetime Achievement Tony Award."

Although she appeared in some movies, because of the Hollywood blacklist, she had more limited output in film and on television, not making her cinematic debut until 1972. She was nominated for a Daytime Emmy Award as "Outstanding Supporting Actress in a Drama Series" for her performance on the television soap opera, One Life to Live.

She married José Ferrer in 1938, with whom she had a daughter, Leticia Ferrer. They divorced in 1948.

She taught at HB Studio, a well-known New York City acting school, starting in 1957, and married its co-founder, Herbert Berghof, on January 25, 1957. After his death in 1990 she became the school's chairwoman.

Ms. Hagen was an influential acting teacher who taught, among others, Matthew Broderick, Christine Lahti, Jason Robards, Sigourney Weaver, Liza Minnelli, Whoopi Goldberg, Jack Lemmon, Robert De Niro, Al Pacino and Benicio Del Toro. While being profiled in Premiere Magazine, actress Amanda Peet said of her mentor Hagen, that she was a woman whose class you didn't want to miss.

She also wrote Respect for Acting (1973) and Challenge for the Actor (1991), which advocates presentational acting, for example through the use of substitution. Hagen later stated that she "disassociated" herself from her first book, "Respect for Acting" (Interview in playbill.com). In "Challenge for the Actor" she renamed the term "substitution," calling it "transference" instead. Though Hagen wrote that the actor should "identify" the character they play with feelings and circumstances from their (the actor's) own life, she also makes clear that "Thoughts and feelings are suspended in a vacuum unless they instigate and feed the selected Actions, and IT IS THE CHARACTER'S ACTIONS WHICH REVEAL the true "you," as the character in the play. Respect for Acting is used as a textbook for many college acting classes.

As well, she published a 1976 cook book entitled "Love for Cooking".