Mills was born in London during World War II, though her parents, actor Sir John Mills (Great Expectations, Swiss Family Robinson), and playwright Mary Hayley Bell ("Whistle down the Wind"), soon moved the family to the country to be away from the bombs.

Mills is the older sister of actress Hayley Mills and of director Jonathan Mills. Because of her parents' fame, Mills grew up surrounded by famous actors such as Rex Harrison, David Niven, and Marlon Brando. Her godmother was Gone with the Wind actress Vivien Leigh, and her godfather was playwright Noel Coward.

She attended the Elmhurst Ballet School, in Camberley, Surrey. Initially Mills did not have interest in becoming an actress, and instead considered becoming a nun. As a baby and small child she had appeared as an extra in various films, such as Freda's 11-week-old baby, in the 1941 film In Which We Serve where her father was starring.

However, when her younger sister Hayley found success as a Disney actress in films such as Pollyanna and The Parent Trap, Mills decided to try her hand at the family business of acting. Her first major role was at the age of 16, in a play called Five Finger Exercise, as the character Pamela Harrington. The show, written by famous playwright Peter Shaffer, played one year in London, and then moved to the Music Box Theatre on Broadway.

Despite her youth, Mills was nominated for a Tony Award in 1960 as "Best Featured Actress". She also acted in films, such as the Western The Rare Breed with Jimmy Stewart. Mills stated that the highlight of her film career was the 1972 film Avanti!, directed by Billy Wilder, and in which she starred with Jack Lemmon. She was nominated in 1973 for a Golden Globe Award for the role.

From 1961 to 1964, Mills was married to Russell Alquist, Jr., with whom she had a son, Sean. In 1975 she married Michael Miklenda, with whom she had a daughter, Melissa Caulfield, before divorcing him in 1980.

Her best known role began in 1970, when she starred in the American television series Nanny and the Professor. She played a friendly character, Phoebe Figalilly, who had magical powers, in a series that was called an American variation of Mary Poppins.

Mills has stated that she herself believes in magic, and witches and fairies. "There's a lot more, you know, in the aether and around us ... We have guides, and we have angels taking care of us ... I believe in metaphysics, in a big way." She was nominated for another Golden Globe Award in 1971 for the role. The series had strong ratings but ran only briefly from 1970 to 1971.

It was later revealed that this was because the network censors had expressed concerns about any hint of sexual chemistry between Mills and her on-screen boss, a professor played by Richard Long. Mills has spoken of how in nighttime scenes she was required to wear a flannel nightgown all the way up to her neck.

The show also suffered from a change in timeslot. Originally airing near the strong combination of The Partridge Family and The Brady Bunch, the show was moved to a different time of the week, and then canceled a half season later.

In 1974, she won an Emmy Award for "Outstanding Single Performance by a Supporting Actress in a Comedy or Drama Special" for the miniseries adaptation of QB VII.

In 1980, she returned to the stage, starring in The Elephant Man with Maxwell Caulfield. The two actors hit it off, and despite their 18-year age difference, the younger Caulfield asked Mills to marry him, and became her third husband.

Mills said of the age difference, "Everybody is always interested in the fact that I am married to someone who is a lot younger than I am ... There are no rules, and that's what I believe, because age doesn't really matter. If you meet someone that you're really close to, someone that you love, stick with that."