Madhubala was born on February 14, 1933 as Mumtaz Jehan Begum Dehlavi. Her father, Attaullah Khan was a Pashtun from the old Peshawar valley, which includes the present-day regions of Mardan and Swabi which are now in Pakistan. Her father belonged to the Yusufzai tribe of the Pashtuns. He relocated the family to Delhi and then Bombay after he lost his job at the Imperial Tobacco Company in Peshawar. The family endured many hardships. Madhubala's three sisters and two brothers died at the ages of five and six. The dock explosion and fire of 14 April 1944 wiped out their small home. The family survived only because they had gone to see a film at a local theater.

With his six remaining daughters to provide for, Khan, and the young Madhubala began to pay frequent visits to Bombay film studios to look for work. At the age of 9, this was Madhubala's introduction to the movie industry, which would provide financial help to her family. Madhubala learned driving at the age of twelve and liked to drive long sometimes.

Madhubala's first movie Basant (1942), was a box office success. She acted as the daughter to the character played by actress Mumtaz Shanti and was credited as Baby Mumtaz in the film. A nine year old Madhubala, then a child artist often tottered around various studios of Bombay in search of work and made several friends there. Around the same time, another child artist Baby Mahajbeen also visited these studios and was known to Madhubala. This Baby Mahjabeen later on, became one of the most sought after stars and one of her contemporaries – Meena Kumari. Madhubala was a fan of Meena Kumari and said: "She has the most unique voice. No other heroine has it". Actress Devika Rani was impressed by her performance and potential, and advised her to assume the screen name "Madhubala", literally meaning "honey belle". Her first lead role, at the age of 14, was with producer Kidar Sharma when he cast her opposite Raj Kapoor in Neel Kamal (1947). This was the last film in which she was credited as Mumtaz before assuming her screen name "Madhubala". She achieved stardom and popularity in 1949 when she was cast as the lead in Bombay Talkies's Mahal – a role intended for well-known star Suraiya. Madhubala, with established actresses, screen-tested for the role before she was selected by the film's director Kamal Amrohi. The film was the third largest hit at the 1949 Indian box office. Following the success of Mahal, Madhubala appeared in the box office hits Dulari (1949), Beqasoor (1950), Tarana (1951) and Badal (1951).

In the early 1950s, as Madhubala became one of the most sought-after actresses in India, she attracted interest from Hollywood. She appeared in the American magazine Theatre Arts where, in its August 1952 issue, she was featured in an article with a full page photograph under the title: "The Biggest Star in the World – and she's not in Beverly Hills". The article described Madhubala's immense popularity in India, and explored her wide appeal and large fan base. It also speculated on her potential for international success. Academy Award winner American director Frank Capra, while visiting Bombay for International Film Festival of India, was keen to give her a break in Hollywood, but her father Ataullah Khan declined this offer.

Madhubala's co-stars Ashok Kumar, Raj Kapoor, Rehman, Pradeep Kumar, Shammi Kapoor, Dilip Kumar, Sunil Dutt and Dev Anand were the most popular of the period. She also appeared with Kamini Kaushal, Suraiya, Geeta Bali, Nalini Jaywant, Shyama and Nimmi, notable leading ladies. The directors she worked with, Mehboob Khan (Amar), Guru Dutt (Mr. & Mrs. '55), Kamal Amrohi (Mahal) and K. Asif (Mughal-e-Azam), were amongst the most prolific and respected. Madhubala also became a producer and produced films like Naata (1955) and Mahlon Ke Khwab (1960) and acted in both the films.

During the 1950s, Madhubala took starring roles in almost every genre of film being made at the time. Her 1950 film Hanste Aansoo was the first ever Hindi film to get an "A" – adults only – rating from the Central Board of Film Certification. She was the archetypal fair lady in the swashbuckler Badal (1951), and following this, an uninhibited village beauty in Tarana (1951). She played the traditional ideal of Indian womanhood in Sangdil (1952), and produced a comic performance as the spoilt heiress Anita, in Guru Dutt's satire Mr. & Mrs. '55 (1955). She also acted in costume dramas such as Shirin-Farhad (1956), Raj-Hath (1956), and played a double role in the social drama Kal Hamara Hai (1959). In the mid-1950s, her films including the major ones such as Mehboob Khan's Amar (1954) did not do well commercially. However, she bounced back between 1958 and 1960 and starred in a series of hit films which included Howrah Bridge opposite Ashok Kumar, Kala Pani opposite Dev Anand, Chalti Ka Naam Gaadi opposite Kishore Kumar, Phagun and Barsaat Ki Raat both opposite Bharat Bhushan. In Howrah Bridge, she played the role of an Anglo-Indian Cabaret singer involved in Calcutta's Chinatown underworld. In the song "Aaiye Meherebaan" from this film, she lip-synced a torch song dubbed by Asha Bhosle which has remained popular to this day. It was in 1960, when she appeared in the magnum opus Mughal-e-Azam.

Madhubala acted in as many as seventy films from 1947 to 1964, but only fifteen were box office successes. Many senior actors praised Madhubala's acting skills. Dilip Kumar regrets that "had she lived, and had she selected her films with more care, she would have been far superior to her contemporaries..." Kumar also points out that "actresses those days faced a lot of difficulties and constraints in their career. Unable to assert themselves too much, they fell back on their families who became their caretakers and defined everything for them."

It was the film Mughal-e-Azam that marked what many consider to be Madhubala's greatest and definitive characterization, as the doomed courtesan Anarkali. Although the film took nine years to complete, it was not until 1953 that Madhubala was finally chosen for the role. Bunny Reuben in his book Dilip Kumar: Star Legend of Indian Cinema claimed that Dilip Kumar's role was instrumental behind this selection. Mughal-e-Azam gave Madhubala the opportunity of fulfilling herself totally as an actress, for it was a role that all actresses dreamt of playing, as Nimmi acknowledges that "as an actress, one gets a lot of roles, there is no shortage of them, but there isn’t always good scope for acting. With Mughal-e-Azam, Madhubala showed the world just what she could do."

However, by the late 1950s, her health was deteriorating rapidly, and director K. Asif, probably unaware of the extent of Madhubala's illness, required long shooting schedules that made physical demands on her, whether it was posing as a veiled statue in suffocating make-up for hours under the studio lights or being shackled with heavy chains. It was also a time when Madhubala's relationship with Dilip Kumar was fading out, and the lives of Madhubala and her screen character were consistently seen as overlapping because of the overwhelming sense of loss and tragedy and the unrelenting diktat of destiny that clung to both and which neither could escape".

Mughal-e-Azam was released on 5 August 1960, and became the highest-grossing film at that time, a record that went unbroken for 12 years until the release of the film Haathi Mere Saathi in 1972. Madhubhala was nominated for a Filmfare Award for her performance in Mughal-e-Azam.

In 1960, Madhubala was at the peak of her career and popularity with the release of Mughal-e-Azam and Barsaat Ki Raat. She did have intermittent releases in the early 1960s. Some of these, such as Jhumroo (1961), Half Ticket (1962) and Sharabi (1964), performed above average at the box office. However, most of her other films released during this time were marred by her absence and subsequent lack of completion due to her prolonged illness. These films suffer from compromised editing, and in some cases the use of "doubles" in an attempt to patch-in scenes that Madhubala was unable to shoot. Her last released film Jwala, although filmed in the late 1950s, was not released until 1971.