Hannigan was born in Washington, D.C. to Albert Hannigan, an Irish American truck driver, and Emilie Posner, a Jewish American real estate agent.[1] Her parents divorced a year after her birth and she was raised mostly by her mother in Atlanta. Although Hannigan had appeared in an industrial film for "Active Parenting" as a baby, as well as starred in a commercial for the "Duncan Hines cookie mix" in 1978, it wasn't until she moved to Los Angeles, California in 1985 that she formally began her acting career. Living with her mother and attending North Hollywood High School, she successfully auditioned for agents while visiting her father in Santa Barbara.

Hannigan's first major film role was in My Stepmother Is an Alien, a science fiction comedy released in 1988; one of her co-stars in the film was actor Seth Green, who would later join her in the regular cast of Buffy as her on-screen boyfriend. Throughout most of the early 1990s, she appeared in commercials and supporting roles on television shows, including Picket Fences, Roseanne and Touched by an Angel.

In 1997, Hannigan was cast to play Willow Rosenberg, Buffy's best friend, on the television series Buffy the Vampire Slayer. The show became a big success, and Hannigan gained recognition, subsequently appearing in several notable films aimed at teenage audiences, including American Pie, Boys and Girls, and American Wedding. By the time Buffy had ended in 2003, Hannigan was earning a $250,000 salary for each episode. She also reprised her role of Willow in a few episodes (including most notably "Orpheus") of the Buffy spin-off, Angel, but none after Buffy finished production.

In early 2004, Hannigan made her West End debut, starring in a stage adaptation of When Harry Met Sally... at the Theatre Royal Haymarket, opposite Luke Perry. In 2005, she returned to starring in a regular television series, appearing in the currently-running show, How I Met Your Mother, and also playing a recurring guest role on Veronica Mars.

In February 2006, Date Movie, in which Hannigan stars as a character meant to be a parody on romantic comedy heroines, was released in theaters.

Hannigan owns a home in Sacramento, California. She married actor Alexis Denisof (who played Wesley Wyndam-Pryce in the Buffy franchise) on 11 October 2003. She had previously dated actor Steven Sutphen and Ginger Fish, a drummer for Marilyn Manson.

Hannigan has been incorrectly rumored to have created a sex tape; the person in the tape is not her, but rather adult film actress Luna Lane.