Liu was born in New York City, and was raised with her older brother, John Ya Liu (Liú Yá Lì), and older sister, Jenny Liu, in Jackson Heights, Queens, New York by Chinese immigrant parents. Her father worked as a civil engineer and her mother as a biochemist in China, but they sacrificed to come to the United States. At one time her father peddled watches in Atlantic City while Liu worked in a pajama factory at age eleven. In an interview with the London Daily Telegraph she said: "It was totally illegal. I actually blocked it out until a few years ago when I said, Oh my God, I was a child sweatshop worker. I didn't want to do it, but what choice did I have." Her family subsisted on boiled rice and cucumber in their cockroach-infested Queens apartment. Liu, at her parents' insistence, devoted her spare time to studying, and she attended New York City's famous Stuyvesant High School. Then she attended New York University for one year, transferred to University of Michigan at Ann Arbor, and graduated with a degree in Chinese Language and Culture.

Liu began acting in 1989 after auditioning for a role in University of Michigan's production of "Alice in Wonderland" during her senior year. Liu won the lead role although she tried out for a supporting role.

Liu had small roles in films and TV roles (for example in X-Files and Seinfeld) before landing a break on Ally McBeal. Liu's role on the series was originally not meant to be regular but the enthusiastic audience response to the actress' 'feisty' Ling Woo secured Liu as a permanent cast member.

She became famous with her turn as Alex in the Charlie's Angels movie, starring with established Hollywood stars Drew Barrymore and Cameron Diaz. The sequel to the film opened to poor reviews and box office.

Liu starred with Antonio Banderas in Ballistic: Ecks vs. Sever, a critical and box-office failure.

Liu is perhaps most famous for her role as O-Ren Ishii (assassin Cottonmouth) in director Quentin Tarantino's Kill Bill films. She won an MTV Movie Award for "Best Movie Villain".

Liu recently appeared on several episodes of Joey with Matt LeBlanc, who played her love interest in the Charlie's Angels movies. She also had a small role as a psychologist opposite Keira Knightley in the thriller Domino. Other appearances include a cameo on the animated show Futurama and recently, The Simpsons. Liu is currently in talks to recreate the Charlie Chan series for modern audiences.

In April 2006, the documentary Freedom's Fury premiered, with Liu as executive producer. The film dramatizes the Fall of 1956 when Hungary exploded in a people power revolt and climaxes with the infamous water polo showdown between Hungary and the Soviet Union at the 1956 Melbourne Olympics, known as the 'Blood in the Water Match.'

Liu has been linked to actor George Clooney. In 2004, she announced her engagement to her boyfriend, New York playwright Zach Helm. Their relationship ended in 2005.

In a Jane interview, she implied her bisexuality, while refusing to label herself as such, by saying, "I think people sometimes get the wrong impression when they're like, 'Oh, well, so-and-so was straight and then she was gay, and now she's straight again,' you know? But it's like, how many times do I have to kiss a woman before I'm gay? Everybody wants to label people. Sometimes you just fall in love with somebody, and you're really not thinking about what gender or whatever they happen to be. I think that if I happen to fall in love with a woman, everyone's going to make a big deal out of it. But if I happen to fall in love with a man, nobody cares."[

With her parents' work ethic, Liu continued, "I'm always multitasking, doing 10 things at once." She is fluent in Mandarin and Italian, studies French and Japanese, rock climbs, practices martial arts, skis, plays the accordion, and makes collages, having done several gallery exhibitions.

In 2005, Liu was appointed a U.S. Fund for UNICEF Ambassador.

Early in 2006, Liu received an "Asian Excellence Award" for Visibility, since she is the most well-known and visible Asian American in the media today.