Palmer, who took her surname from an English actress she admired, was one of three daughters born to Dr. Alfred Peiser, a German Jewish surgeon, and Rose Lissman, an Austrian Jewish stage actress in Posen, Prussia, Germany (now Poznań, Poland). When Lilli was four her family moved to Berlin-Charlottenburg. She studied drama in Berlin before fleeing to Paris in 1933 following the Nazi takeover. While performing in cabarets, she attracted the attention of British talent scouts and was offered a contract by the Gaumont Film Company. She made her screen debut in Crime Unlimited (1935) and appeared in British films for the next decade.
In 1943, she married actor Rex Harrison and followed him to Hollywood in 1945. She signed with Warner Brothers and appeared in several films, notably Cloak and Dagger (1946) and Body and Soul (1947). She also periodically appeared in stage plays as well as hosting her own television series in 1951. Harrison and Palmer appeared together in the hit Broadway play Bell, Book and Candle in the early 50s and later starred in the film version of The Four Poster (1952), which was based on the award-winning Broadway play of the same name, written by Jan de Hartog. She won theVolpi Cup for Best Actress in 1953 for The Four Poster. Harrison and Palmer divorced in 1956; they had one son, Carey Harrison, born in 1944.
Palmer returned to Germany in 1954 where she played roles in many films and television productions. She also continued to play both leading and supporting parts in the U.S. and abroad. In 1957, she won the Deutscher Filmpreis for Best Actress for her portrayal of Anna Anderson in The Story of Anastasia, called Is Anna Anderson Anastasia? in the UK. In 1958, she played the role of a teacher opposite Romy Schneider in Mädchen in Uniform (Girls in Uniform), the remake of the 1931 film of the same title. Ms. Palmer starred with Fred Astaire and Debbie Reynolds in The Pleasure of His Company in 1961. She starred opposite William Holden in The Counterfeit Traitor (1962), an espionage thriller based on fact, and opposite Robert Taylor in another true World War II story, Disney's Miracle of the White Stallions (1963). On the small screen, in 1974 she starred as Manouche Roget in the six-part television drama series The Zoo Gang, about a group of former underground freedom fighters from World War II, with Brian Keith, Sir John Mills, and Barry Morse.
A talented writer, Palmer published a memoir, Change Lobsters and Dance, in 1975. Reminiscences by Vivian Matalon and Noël Coward (Matalon directed Palmer in the premiere production of Coward's play Suite in Three Keys in 1966; see A Song at Twilight) suggest that Palmer was not always the patient and reasonable person she represented herself as being in this autobiography. She wrote a full-length work of fiction presented as a novel rather than a memoir, The Red Raven in 1978.
Palmer was married to Argentine actor Carlos Thompson from 1957 until her death in Los Angeles from cancer in 1986 at the age of 71.
Lilli Palmer is interred at Forest Lawn Memorial Park, Glendale, California.