Peggy's father was Benjamin Guggenheim, a son of the wealthy mining magnate Meyer Guggenheim, and one of her uncles was Solomon R. Guggenheim, who founded the Guggenheim Museum in New York. Benjamin died in the Titanic disaster in 1912, and his daughter came into her fortune in 1919. Unhappy with her bourgeois existence, she married the writer Laurence Vail in 1922 (divorced 1930) and adopted a bohemian lifestyle. She moved to Paris in 1930, and in 1938 she opened a gallery to exhibit and sell modern art.

Guggenheim returned to the United States in 1941 and married the Surrealist painter Max Ernst (Ernst, Max) (divorced 1946). In 1942 she opened another art gallery, Art of This Century, in New York, and many of the artists she supported received their first one-man shows there. Among the important painters she sponsored were Jackson Pollock (Pollock, Jackson), Mark Rothko (Rothko, Mark), Robert Motherwell (Motherwell, Robert), and Hans Hofmann (Hofmann, Hans).

After World War II Guggenheim moved to Venice, where she settled in an 18th-century palazzo on the Grand Canal. There she displayed some of her art collection to the public, and in 1979 she donated the collection to the Solomon R. Guggenheim Foundation, which owns the Guggenheim Museum in New York. Known as the Guggenheim Collection, this donation contains many masterpieces of modern painting and is still on display in Venice.