Carla Bley was born Lovella May Borg on May 11, 1936, in Oakland, California, to Swedish parents. Her father, Emil Borg, was a piano teacher and church choirmaster who encouraged her to sing and to learn the piano; her mother, Arline Anderson, died of a heart attack when Bley was eight. She moved to New York City at seventeen and found work as a cigarette girl at Birdland, where she met the pianist Paul Bley, who encouraged her to start composing. She toured with him as Karen Borg, took the name Carla Borg in 1957, married him that year, and kept his surname professionally after the marriage ended.

Her tunes reached records before she made one of her own. George Russell recorded her "Bent Eagle" on Stratusphunk in 1960, Jimmy Giuffre recorded "Ictus" on Thesis in 1961, Paul Bley's 1964 album Barrage consisted entirely of her compositions, and Art Farmer recorded "Sing Me Softly of the Blues" in 1965. In 1964 she helped organize the Jazz Composers Guild, which gathered the most adventurous musicians then working in New York. The big band that she and the trumpeter Michael Mantler formed for the Guild made its first record in April 1965 and, after the Guild dissolved, continued as the Jazz Composer's Orchestra; its nonprofit arm, the Jazz Composers Orchestra Association, followed in 1966. Bley and Mantler were married from 1965 to 1991 and had a daughter, the pianist and singer Karen Mantler. Bley's first album under her own name, Jazz Realities (Fontana, 1966), was made with Mantler and Steve Lacy.

In 1967 she wrote A Genuine Tong Funeral for the vibraphonist Gary Burton, an extended dirge recorded that July and released by RCA in 1968, on which she conducted and played piano and organ. In April 1969 she arranged the music for bassist Charlie Haden's Liberation Music Orchestra, whose debut Impulse! album appeared in 1970. Her largest work of the period was Escalator over the Hill, a "chronotransduction" with words by the poet Paul Haines, recorded between 1968 and 1971 and issued as a triple LP on the orchestra's own label. More than forty musicians took part, among them Haden, the bassist and singer Jack Bruce, Gato Barbieri, the guitarist John McLaughlin, Don Cherry, Sheila Jordan, Linda Ronstadt and Bley and Mantler's four-year-old daughter. She received a Guggenheim Fellowship for music composition in 1972.

In 1973 Bley and Mantler founded WATT Records, distributed by ECM, and set up the New Music Distribution Service to carry WATT and other small labels devoted to creative improvised music. WATT became her main outlet from Tropic Appetites (1974) onward. Dinner Music (recorded 1976, released 1977) put her organ and piano in front of a horn section with Steve Gadd on drums, and from there she kept a working band that toured Europe and recorded European Tour 1977, Musique Mecanique, Social Studies (1981), Live! and Heavy Heart. She wrote the whole of drummer Nick Mason's solo debut, Nick Mason's Fictitious Sports (1981), played on Jack Bruce's mid-1970s band recordings, and returned to the Liberation Music Orchestra for The Ballad of the Fallen (ECM, 1983).

After her marriage to Mantler ended she formed a relationship with the bassist Steve Swallow, who became her closest musical partner. They made duo records (Duets, 1988; Go Together, 1993; Are We There Yet?, 1999), and she led her own ensembles on Night-Glo (1985), Sextet (1987), the live Fleur Carnivore (1989) and a run of large-band albums: The Very Big Carla Bley Band (1991), Big Band Theory (1993), The Carla Bley Big Band Goes to Church (1996), Looking for America (2003) and Appearing Nightly (2008), with the quartet record The Lost Chords (2004) in between. Her trio with Swallow and the saxophonist Andy Sheppard began with Songs with Legs (1994) and, with Trios (2013), became her first release on ECM itself rather than on WATT; Andando el Tiempo (2016) and Life Goes On (2020) completed the trilogy. She arranged and played on Haden's Not in Our Name (2005) and wrote the title piece of the Liberation Music Orchestra's final album, Time/Life (Impulse!, 2016), made after Haden's death in 2014. She received the German Jazz Trophy "A Life for Jazz" in 2009 and an NEA Jazz Masters award in 2015. Diagnosed with brain cancer in 2018, she passed away at home in Willow, New York, on October 17, 2023, at the age of 87.

Bley described herself as ninety-nine percent composer and one percent pianist, and her piano playing is notably economical, a spare and wry voice that serves the writing. Her pieces could be ethereally beautiful or subversively brash, and her humor runs through titles and arrangements; the Penguin Guide to Jazz found wry music beneath the bookish cover of Social Studies. She joked that jazz let a composer leave gaps for the band to fill, and she wrote for the players in front of her. Escalator over the Hill alone ranges from Kurt Weill-style theater music to free jazz, rock and Indian music. Many of her tunes, among them "Ida Lupino", "Vashkar", "Jesus Maria", "King Korn" and "Sing Me Softly of the Blues", became repertoire for others: they were taken up by Paul Bley (who devoted entire albums to them), Gary Burton, Giuffre, George Russell and Art Farmer in her lifetime, and later by players such as John Scofield, who recorded "Lawns" on A Moment's Peace (2011). After her death, the guitarist Steve Cardenas, saxophonist Ted Nash and bassist Ben Allison released the tribute album Healing Power: The Music of Carla Bley (Sunnyside, 2022). German critic Wolfgang Sandner summed up her value as a stimulator, muse and catalyst who refused showy virtuosity and false pathos.