Fonda was born in New York, New York, the son of actor Henry Fonda, the brother of actress Jane Fonda, the father of actress Bridget Fonda, and a distant relative of NBC evening news anchor Tom Brokaw. His mother, Frances Ford Seymour, took her own life in 1950.

Fonda studied acting in Omaha, Nebraska, which was his father's home town. He began attending the University of Omaha and joined the Omaha Community Playhouse, where many actors (including his father and Marlon Brando) founded their careers. Fonda found work on Broadway where he achieved notice in Blood, Sweat and Stanley Poole, before going to Hollywood to make films.

Fonda started his film career in romantic leading roles. He debuted in Tammy and the Doctor (1963), which he called "Tammy and the Schmuckface." But Fonda's intensity impressed Robert Rossen, the director of Lilith (1964). Rossen envisioned a Jewish actor in the role of Stephen Evshevsky, a mental patient. Fonda earned the role after removing his boss' glasses from his face and putting them on so as to look more "Jewish." He also played the male lead in The Young Lovers (1964), about out-of-wedlock pregnancy, and The Victors (1964), an "anti-war war movie."

By the mid-1960s, Peter Fonda was not a conventional "leading man" in Hollywood. As Playboy magazine reported, Fonda had established a "solid reputation as a dropout." He had become outwardly nonconformist and grew his hair long, alienating the "establishment" film industry. Desirable acting work became scarce.

Through his friendships with members of the Byrds, Fonda visited The Beatles in their rented house in Benedict Canyon in Los Angeles in August, 1965. While John Lennon, Ringo Starr and George Harrison were under the influence of LSD, Lennon heard Fonda say, "I know what it's like to be dead." This phrase became the tag line for their song "She Said, She Said", which appeared in their groundbreaking Revolver (1966) album. In 1966, Fonda was arrested in the anti-war Sunset Strip riot which the Los Angeles Police Department ended forcefully. The band Buffalo Springfield protested the department's handling of the incident in their song "For What it's Worth."

Fonda's first counterculture-oriented film role was the lead character Heavenly Blues, a Hells Angels chapter president, in the Roger Corman-directed film The Wild Angels (1966). The Wild Angels is still remembered for Fonda's "eulogy" delivered at the fiasco of a fallen Angel's funeral service, which was sampled in the Primal Scream recording "Loaded" (1991), and in other rock songs. Then Fonda played the male lead character in Corman's film The Trip (1967), a television commercial director experiencing the ambivalence and turmoil of divorce.

In 1968 Fonda produced Easy Rider, the classic film for which he is best known. Easy Rider is about two long-haired bikers traveling through the southwest and southern United States in a world of intolerance and violence. The Fonda character was the charismatic, laconic "Captain America"/Wyatt whose motorcycle jacket bore a large American flag across the back. Dennis Hopper played the garrulous "Billy." Jack Nicholson was nominated for an Academy Award (TM) for Best Supporting Actor for his turn as George Hanson, an alcoholic civil rights lawyer who rides along. Fonda co-wrote Easy Rider with Terry Southern and Hopper, who directed.

Hopper filmed the cross-country road trip depicted in Easy Rider almost entirely on location, spending US $375,000.00, and released the film in 1969 to massive success. Robbie Robertson was so moved by an advance screening that he approached Fonda and tried to convince him to let him write a complete score, even though the film was nearly due for wide release. Fonda refused, using the Byrds' song "Ballad of Easy Rider," Dylan's "It's Alright Ma, I'm Only Bleeding" sung by the Byrds' Roger McGuinn. Fonda, Hopper and Southern were nominated for the Academy Award (TM) for Best Original Screenplay.

Fonda received critical recognition for his part in Ulee's Gold (1997). Fonda portrayed a stoic north Florida beekeeper who, in spite of his tumultuous family life, imparts a sense of integrity to his wayward convict son, and takes risks in acting protectively toward his drug-abusing daughter-in-law. Fonda's performance resulted in an Academy Award nomination (TM) for Best Actor.

Fonda's choices of film roles are notable for extreme contrasts in type: The introverted and drug-dealing (and perhaps amoral) rebel biker in Easy Rider is a world apart from the war-veteran father in Ulee's Gold, a man whose strength is in his benevolence.

Peter Fonda will appear in the 2007 film Ghost Rider as Mephisto, one of the rulers of one of Marvel Comics various realms of Hell.