After earning a bachelor's degree in literature (1972) from the University of Sydney, Grenville began working as a film editor, writer, and script consultant. In the late 1970s she held various jobs in London and Paris and then went to the United States, where she received a master's degree in creative writing (1982) from the University of Colorado. Two years later she published her first book, Bearded Ladies, a collection of short stories that explored gender, power, and Australian national identity, all of which would remain central to Grenville's later work. Lilian's Story (1984), her first published novel, and Dreamhouse (1986) both examined women struggling against oppressive situations: Lilian Singer is a woman abused by her father, and Louise Dufrey is a wife facing a disintegrating marriage. Joan Makes History (1988) considers the subject of Australian history and identity through the story of Joan, born in 1901, the year of Australia's federation. As Joan moves through her life, she imagines a multiplicity of other Joans present at different moments in Australia's history, a device that allowed Grenville to sift the intersections of personal and “official” history.

After moving to Colorado, Grenville began teaching, and with The Writing Book: A Workbook for Fiction Writers (1990), she began publishing books about her craft. In 1994 she returned to the subject matter of Lilian's Story with Albion's Story (also published as Dark Places), a savage portrait of Lilian's father told in his own words. Grenville achieved major international success with The Idea of Perfection (1999), a story of the growing attraction between a recent divorcé and a woman whose third marriage ended with her husband's suicide, two outsiders thrown together in a small town in the Australian bush. The best-selling novel—which also explored issues facing contemporary rural Australia, among them economic development, historical preservation, and tourism—won Britain's 2001 Orange Prize for Fiction.

In 2006 Grenville captured the Commonwealth Writers' Prize and earned a place on the short list of Man Booker Prize nominees with The Secret River (2006). Set in the early 19th century, it traced the life of an impoverished Englishman—William Thornhill, a waterman on the Thames—who is convicted of theft and transported to Australia. Accompanied by his wife, he is eventually pardoned and seeks to settle a plot of land. His plan to work “his” corner of Australia is soon disrupted, however, by those who already occupy the land: the Darug, an Aboriginal people.