Coelho was raised in Rio de Janeiro. He rebelled against the conventions of his Roman Catholic upbringing and as a result was temporarily committed to a psychiatric hospital by his parents. Coelho dropped out of law school in 1970 and traveled through South America, Mexico, North Africa, and Europe. In 1972 he returned home and wrote pop music lyrics, notably for Raul Seixas, a well-known Brazilian singer. In 1974 Coelho was briefly imprisoned for alleged subversive activities against the Brazilian government.

After his release he worked for Polygram and CBS Records until 1980, when he embarked on new travels in Europe and Africa. It was during this trip that he walked the route of Santiago de Compostela, some 500 miles (800 km) of roads first used during the Middle Ages by pilgrims traveling from France to Spain. This extensive journey, inflected by a renewed interest in Catholicism, formed the basis of his first book, O diário de um mago (1987), which was published in English as The Diary of a Magus in 1992 and was reissued as The Pilgrimage in 1995.

In 1988 Coelho published O alquimista (The Alchemist), a mystical account of an Andalusian shepherd boy's journey across North Africa in search of treasure. After being dropped by its first publisher, the book was reissued to great success in Brazil and—in translation—abroad. His memoir As Valkírias (1992; The Valkyries) recounts a quest to speak with angels, undertaken with his first wife during their youthful immersion in the countercultural milieu of the 1970s. He again turned to fiction with Na margem do rio Piedra eu sentei e chorei (1994; By the River Piedra I Sat Down and Wept), which concerns the spiritual reawakening of a young Spanish woman.

Coelho, who had recorded the trajectory of his return to the Catholic faith in The Pilgrimage and The Valkyries, continued to centre both his fiction and nonfiction works on questions of faith and spirituality. O Monte Cinco (1996; The Fifth Mountain) retells the story of the Biblical prophet Elijah while Manual do guerreiro da luz (1997; Manual of the Warrior of Light) couches a selection of spiritual exhortations from well-known religious figures in a fictional framework. Though Coelho's novels continued to succeed both in Brazil and abroad, critics often characterized them as overly didactic and moralizing.

Coelho's later novels include Veronika decide morrer (1998; Veronika Decides to Die), which mines the perceived mental instability of his youth; O demônio e a Señorita Prym (2000; The Devil and Miss Prym), an investigation of the essential nature of humankind; and Onze minutos (2003; Eleven Minutes), which explores the boundaries between love and sex through the story of a prostitute. A bruxa de Portobello (2006; The Witch of Portobello) tells the story of a female religious leader in the form of interviews with those who knew her, while O Vencedor está só (2008; The Winner Stands Alone) is a thriller set against the Cannes Film Festival.

In 1996 Coelho published Frases, a collection of short excerpts from his oeuvre; Life: Selected Quotations, a similar collection of excerpts translated into English, was released in 2007. Coelho compiled selections from his weekly column in the newspaper O Globo into a volume titled Maktub (“It Is Written”) in 1997. Using the Internet, Coelho broadened his readership by blogging (blog), expounding upon ideas advanced in his books, and making his books available for free. He founded the Paulo Coelho Institute in 1996 to provide aid to children and the elderly.