Shields was born in Oak Park, Illinois. She studied at Hanover College Indiana, where she became member of the Alpha Delta Pi sorority; during this time she studied for a semester at the University of Exeter in England, and the University of Ottawa, where she received an MA.

In 1956, while on a college exchange visit to Scotland, she met a Canadian engineering student, Donald Hugh Shields. The couple married in 1957 and moved to Canada, where they had a son and four daughters. Shields later became a Canadian citizen.

In 1973, Shields became editorial assistant for the journal Canadian Slavonic Papers. In 1977, she became a professor at the University of Ottawa, where she stayed for a year. She later taught at the University of British Columbia and travelled around the country. In 1980, she and Don settled in Winnipeg, Manitoba, after Don was hired to teach in the University of Manitoba's Faculty of Engineering. Winnipeg was where she wrote her major books. She also became a professor of English at the University of Manitoba. In 1996, she became chancellor of the University of Winnipeg. In 2000, after Don's retirement, the couple moved to Victoria, British Columbia, where she died in 2003 of breast cancer at age 68.

Shields' daughter Anne Giardini is also a writer. Giardini has contributed to the National Post as a columnist, and has published her first novel, The Sad Truth About Happiness. Anne's second novel, Advice for Italian Boys, was published in 2009.

Shields was the author of several novels and short story collections, including The Orange Fish (1989), Swann (1987), Various Miracles (1985), Happenstance (1980), and The Republic of Love (1992). She was the recipient of a Canada Council Major Award, two National Magazine Awards, the 1990 Marian Engel Award, the Canadian Author's Award, and a CBC short story award. She was appointed as an officer of the Order of Canada in 1998 and was elevated to companion of the Order in 2002. Shields was also a fellow of the Royal Society of Canada and a member of the Order of Manitoba.

The Stone Diaries (1993) won the 1995 Pulitzer Prize for Fiction and the 1993 Governor General's Award, the only book to have ever received both awards. It was nominated for the U.S. National Book Critics Circle Award and the 1993 Booker Prize, and was named one of the best books of the year by Publishers Weekly. It was also chosen as a "Notable Book" by The New York Times Book Review, which wrote "The Stone Diaries reminds us again why literature matters."

She won the 1998 Orange Prize for Fiction for her 1997 novel Larry's Party. Her last novel, Unless (2002), was nominated for the 2002 Giller Prize, the Governor General's Award, the Booker Prize and the 2003 Orange Prize for Fiction. It was awarded the Ethel Wilson Fiction Prize.

Shields was also intensely interested in Jane Austen. She wrote the biography entitled Jane Austen, which won the $25,000 Charles Taylor Prize for literary non-fiction in April 2002, an award accepted by her daughter Meg on her behalf in Toronto, Ontario, on April 22, 2002.

Her last novel, Unless, contains a passionate defense of female writers who write of 'domestic' subjects.

Following her death, six of her short stories were adapted by Shaftesbury Films into the dramatic anthology series The Shields Stories.

Novels

• Small Ceremonies, 1976
• The Box Garden, 1977 (Later published in a joint edition with Small Ceremonies as Duet)
• Happenstance, 1980
• A Fairly Conventional Woman, 1982
• A Mystery, 1987 (UK title: Mary Swann)
• A Celibate Season, 1991 (with Blanche Howard)
• The Republic of Love, 1992
• The Stone Diaries, 1993 (winner of the Governor General's Award, National Book Critics Circle Award, and the Pulitzer Prize)
• Larry's Party, 1997 (winner of the Orange Prize, and the Prix de Livre)
• Unless, 2002 (winner of the Ethel Wilson Fiction Prize, shortlisted for the 2003 Orange Prize)

Short stories

• Various Miracles, 1985
• The Orange Fish, 1989
• Dressing Up for the Carnival, 2000
• Collected Stories, 2004

Poetry

• Others, 1972
• Intersect, 1974
• Coming to Canada, 1992

Plays

• Departures and Arrivals, 1990
• Thirteen Hands, 1993
• Fashion Power Guilt and the Charity of Families, 1995 (with Catherine Shields)
• A Comedy, 1998 (with Dave Williamson)
• Women Waiting

Criticism

• Voice and Vision, 1976

Biography

• Jane Austen, 2001

Anthologies

• What We aren't Told, 2001 (edited with Marjorie Anderson)
• More of What We aren't Told, 2003 (edited with Marjorie Anderson)