Livni's Polish-born parents Eitan (Benozovich) Livni and Sarah (née Rosenberg) were both active in Irgun Zvai Leumi, a militant Jewish group that fought for the foundation of Israel and was the precursor of the hawkish Herut and Likud parties. After serving as a lieutenant in the Israel Defense Forces, in 1979 she began a law degree at Bar-Ilan University. The following year she was recruited by the Israeli intelligence organization Mossad, and her studies were interrupted in 1983 when she was sent on a mission in Paris. She left the agency shortly thereafter and married accountant Naftali Shpitzer, with whom she later had two sons. In 1984 she completed her degree, and from 1984 to 1996 she practiced law, specializing in real estate and corporate law.

Livni entered politics following the 1995 assassination of Israeli Prime Minister Yitzhak Rabin (Rabin, Yitzhak) by a right-wing Jewish extremist. She believed that Israel's political right had been unfairly discredited by the assassination and was determined to reverse the Oslo process Rabin had led (see Israel: The Oslo Accords (Israel)). When she failed to win a Knesset seat in the 1996 election, newly elected Prime Minister Benjamin Netanyahu (Netanyahu, Benjamin) of the Likud party appointed her head of the Government Companies Authority, where she oversaw a large privatization program.

In 1999 Livni narrowly won a seat in the Knesset in an election swept by the Israel Labour Party. Her rapid political ascent began two years later when Likud's Ariel Sharon (Sharon, Ariel) replaced Ehud Barak (Barak, Ehud) as prime minister, and, after holding a number of junior portfolios and cultivating a highly principled image, she became minister of justice in early 2005. During this time her views on the Arab-Israeli conflict underwent a dramatic change: whereas she had previously supported an Israeli state that encompassed all of the West Bank and Gaza Strip, she became a supporter of the policy of land for peace, with the belief that a Palestinian state was necessary to maintain Israel as a democratic, Jewish-majority state. To that end, as a member of Sharon's inner circle, she helped plan Israel's unilateral withdrawal from the Gaza Strip in the summer of 2005.