From his progressive mother (a pianist and crack shot with a rifle), Welles learned to play the piano and the violin. His parents separated when he was six years old, and his mother died when he was eight. Through his father, a successful inventor and manufacturer, who died when his son was 13, Welles met actors and sportsmen. By the time he was 11, Welles had traveled around the world twice. He attended the Todd School for Boys in Woodstock, Illinois, where he was an indifferent student but learned much about dramatics. He studied briefly at the Art Institute of Chicago and worked as a reporter before going to Ireland, where he made a sketching tour by donkey cart. His stage debut was made at the Gate Theatre, Dublin, in the autumn of 1931, where he acted in Hamlet. Welles remained in Ireland for a year, acting with the Abbey Players as well as at the Gate. After a tour of Spain and Morocco, he returned to Chicago and then toured with Katharine Cornell (Cornell, Katharine)'s company in 1933–34, playing Mercutio in Romeo and Juliet, Marchbanks in Candida, and Octavius Barrett in The Barretts of Wimpole Street. In 1934 he organized a drama festival at Woodstock, where he played Hamlet. He made his New York debut as Tybalt in Romeo and Juliet in December 1934. Welles was the director of an all-black cast in Macbeth for the Negro People's Theatre, a part of the Federal Theatre Project (WPA Federal Theatre Project), in 1936. In 1937 he formed the Mercury Theatre, which presented a renowned modern-dress version of Shakespeare's Julius Caesar.

His radio career began early in 1934 in an adaptation of the poet Archibald MacLeish's verse play Panic. In 1934–35 he narrated The March of Time news series, and subsequent radio roles included the part of Lamont Cranston in the mystery series The Shadow. In 1938 the Mercury players undertook a series of radio dramas adapted from famous novels. They attained national notoriety with the program based on H.G. Wells's War of the Worlds; the performance on October 30, 1938, using the format of a simulated news broadcast, announced an attack on New Jersey by invaders from Mars. Thousands of listeners, not realizing the announcement was a simulation, were panic-stricken.

Welles also appeared as an actor in many other films, including Jane Eyre (1944), The Third Man (1949), The Long, Hot Summer (1958), Compulsion (1959), A Man for All Seasons (1966), and Catch-22 (1970). His later stage work included the title roles in Othello (London, 1951) and King Lear (New York City, 1956).