Nichols immigrated with his family to the United States at the age of seven. He attended the University of Chicago (1950–53), studied acting under Lee Strasberg in New York City, and then returned to Chicago, where, with Elaine May, Shelley Berman, Barbara Harris, and Paul Sills, he formed the comic improvisational group The Compass Players. Nichols and May then traveled nationwide with their social-satire routines, and from 1960 to 1961 they performed on Broadway in An Evening with Mike Nichols and Elaine May.

Nichols made his Broadway directorial debut with the highly praised Barefoot in the Park (1963) and went on to direct a series of commercially and critically successful Broadway plays, many written by Neil Simon (Simon, Neil). He won Tony awards for Barefoot in the Park, Luv (1964), The Odd Couple (1965), Plaza Suite (1968), The Prisoner of 2nd Avenue (1971), and Tom Stoppard's The Real Thing (1984). He also directed The Gin Game (1977).

His first film was Who's Afraid of Virginia Woolf? (1966), a powerful rendering of the Edward Albee play. This was followed by The Graduate (1967), a landmark film about the conflicts of the generation of the 1960s for which he received an Academy Award for best director. Other notable films include Catch-22 (1970), a macabre look at warfare; Carnal Knowledge (1971); Silkwood (1983), an examination of the practices of the nuclear power industry; Postcards from the Edge (1990); Wolf (1994); and The Birdcage (1996). At the beginning of the 21st century, Nichols also directed Closer (2004) and Charlie Wilson's War (2007). Nichols received Emmy Awards for his work on the made-for-television adaptations of Wit (2001) and Angels in America (2003). His films typically are marked by his cynical commentary on contemporary life, often underlined by humour.