Lee was born Norma Deloris Egstrom in Jamestown, North Dakota, the seventh of eight children of Marvin Olof Egstrom, a station agent for the Midland Continental Railroad, and his wife Selma Amelia (Anderson) Egstrom. She and her family were Lutherans. Her father was Swedish American and her mother was Norwegian American. Her mother died when Lee was just four years old. Afterward, her father married Min Schaumber, who treated her with great cruelty while her alcoholic father did little to stop it. As a result, she developed her musical talent and took several part-time jobs so that she could be away from home.
Lee first sang professionally over KOVC radio in Valley City, North Dakota. She later had her own series on a radio show sponsored by a local restaurant that paid her a salary in food. Both during and after her high school years, Lee sang for small sums on local radio stations. Radio personality Ken Kennedy, of WDAY in Fargo, North Dakota (the most widely heard station in North Dakota), changed her name from Norma to Peggy Lee. Miss Lee left home and traveled to Los Angeles at the age of 17.
She returned to North Dakota for a tonsillectomy, and was noticed by hotel owner Frank Beringin while working at the Doll House in Palm Springs, California. It was here that she developed her trademark, sultry purr – having decided to compete with the noisy crowd with subtlety rather than volume. Beringin offered her a gig at The Buttery Room, a nightclub in the Ambassador Hotel East in Chicago. There, she was noticed by bandleader Benny Goodman. According to Lee, "Benny's then-fiancée, Lady Alice Duckworth, came into The Buttery, and she was very impressed. So the next evening she brought Benny in, because they were looking for a replacement for Helen Forrest. And although I didn't know, I was it. He was looking at me strangely, I thought, but it was just his preoccupied way of looking. I thought that he didn't like me at first, but it just was that he was preoccupied with what he was hearing." She joined his band in 1941 and stayed for two years.
In 1942 Lee had her first No. 1 hit, "Somebody Else Is Taking My Place", followed by 1943's "Why Don't You Do Right?" (originally sung by Lil Green), which sold over a million copies and made her famous. She sang with Goodman's orchestra in two 1943 films, Stage Door Canteen and The Powers Girl.
In March 1943 Lee married Dave Barbour, a guitarist in Goodman's band. Peggy said, "David joined Benny's band and there was a ruling that no one should fraternize with the girl singer. But I fell in love with David the first time I heard him play, and so I married him. Benny then fired David, so I quit, too. Benny and I made up, although David didn't play with him anymore. Benny stuck to his rule. I think that's not too bad a rule, but you can't help falling in love with somebody."
When Lee and Barbour left the band, the idea was that he would work in the studios and she would keep house and raise their daughter, Nicki. But she drifted back to songwriting and occasional recording sessions for the fledgling Capitol Records in 1947, for whom she produced a long string of hits, many of them with lyrics and music by Lee and Barbour, including "I Don't Know Enough About You" (1946) and "It's a Good Day" (1947). With the release of the US No. 1-selling record of 1948, "Mañana", her "retirement" was over.
In 1948 Lee joined Perry Como and Jo Stafford as a rotating host of the NBC Radio musical program The Chesterfield Supper Club. She was also a regular on NBC's Jimmy Durante Showand appeared frequently on Bing Crosby's radio shows throughout the late 1940s and early 1950s.
She left Capitol for Decca Records in 1952, but returned to Capitol in 1957. She is most famous for her cover version of the Little Willie John hit "Fever" written by Eddie Cooley and John Davenport, to which she added her own, uncopyrighted lyrics ("Romeo loved Juliet," "Captain Smith and Pocahontas") and her rendition of Leiber and Stoller's "Is That All There Is?". Her relationship with the Capitol label spanned almost three decades, aside from her brief but artistically rich detour (1952–1956) at Decca Records, where in 1953 she recorded one of her most acclaimed albums, Black Coffee. While recording for Decca, Lee had hit singles with the songs Lover and Mister Wonderful.
Lee is today internationally recognized for her signature song "Fever". She had a string of successful albums and top 10 hits in three consecutive decades. She is regarded as one of the most influential popular singers of all time, being cited as an influence by diverse artists such as Petula Clark, Paul McCartney, Bette Midler, Madonna, Shirley Horn, Dusty Springfield and k.d. lang. Lee was also an accomplished actress.
In her 60-year-long career, Peggy was the recipient of three Grammy Awards (including the Lifetime Achievement Award), an Academy Award nomination, The American Society of Composers, Authors and Publishers (ASCAP) Award, the President's Award, the Ella Award for Lifetime Achievement, and the Living Legacy Award from the Women's International Center. In 1999 Lee was inducted into the Songwriters Hall of Fame.