Born in Appleton, Wisconsin, the seventh of eight children, he acquired the nickname "Willem" in childhood. After graduating from Appleton East High School, he studied drama at UW-Milwaukee, but left before graduation in order to join the newly formed avant-garde group Theatre X. After touring with Theatre X for four years in the United States and Europe, he moved to New York City and joined the Performance Group, where he met director Elizabeth LeCompte. LeCompte and Dafoe left the Performance Group together became professional collaborators, and began a relationship. Their son, Jack, was born in 1982. Dafoe married Italian actress Giada Colagrande on March 25, 2005.

Dafoe's film career began in 1981, when he was cast in Heaven's Gate, but his role was removed from the film during editing. A year later he starred as the leader of a motorcycle gang in The Loveless, but his first breakthrough film role was as the compassionate Sergeant Elias in Platoon (1986). He has since become a popular character actor; due to his harsh facial features, he is often typecast as unstable or villainous characters, most recently the Green Goblin in the Spider-Man movies. Before that, he was briefly considered for the role of The Joker by Tim Burton and Sam Hamm for the Batman film in 1989. Hamm recalls "We thought, 'Well, Willem Dafoe looks just like The Joker.'" The role ended up going to Jack Nicholson [1] He also played Jesus in The Last Temptation of Christ (1988), which moved Sergio Leone to exclaim, "This is the face of a murderer, not of Our Lord!" He once remarked "To this day, I can't believe I was so brazen to think I could pull off the Jesus role," though Dafoe received acclaim despite the controversy surrounding the film.

Twice he has played peculiar detectives, once in The Boondock Saints (1999), and again in American Psycho (2000). He was nominated for the Academy Award for Best Supporting Actor in 1986 for Platoon and 2000 for Shadow of the Vampire. After Spider-Man, Dafoe had a rare opportunity to play a heroic film role when he provided the voice of Gill in the animated movie Finding Nemo.

He worked briefly as a model in a 1990 Prada campaign.

In 2004, Dafoe lent his likeness and voice for the highly successful James Bond video game Everything or Nothing as villain Nikolai Diavolo.