Donnelly spent her early childhood in Rugby in the English Midlands, and moved to Vienna in her later childhood. The daughter of an Englishman and an Austrian, she started a career in journalism already in her youth. In Vienna, she worked as a texter in the news agency APA, where her mother had also worked. In 1973 she moved to Berlin, married Peter Lustig (Löwenzahn/ZDF) and started writing Hörspiele (audio dramas) for children. She won the German prize for youth literature with her first book. In the 1980s, she became a disciple of Indian mystic Osho. At present she lives with her current husband, author Paul Arató, in Ibiza. Donnelly's two grown-up sons live in England and America.

At age 26, Donnelly published her first book: Servus Opa, sagte ich leise, a story of a small boy telling about the death of his grandfather. The book won the German youth literature prize and the Hans-im-Glück prize in 1978. The book about the accompanying TV series won the Adolf Grimme prize in 1979.

Two of her most famous series are Benjamin Blümchen ("Benjamin Blossom"), which deal with the adventures of the talking elephant Benjamin and his little friend, the boy Otto, and Bibi Blocksberg, a series about the adventures of a young mischievous witch. Since 1977, Donnelly has written 65 episodes of Benjamin Blümchen and 40 episodes of Bibi Blocksberg. After seven years, she sold the rights to the works and moved to Majorca. The Benjamin Blümchen audio cassettes have sold over 54 million copies. Summer 2007 marked the 30th anniversary of the series.

Donnelly has also written the new Hörspiel and book series Elea Eluanda, a story about a disabled girl, who hasn't let her fate put her down, and is accompanied by her Indian friend Ravi and her trusty owl Ezechiel. Keeping in with Donnelly's style, all episodes of the series have easily recognisable signature sounds or phrases: Ezechiel's Aramba cholé is as famous as Bibi Blocksberg's Hex-hex or Benjamin Blümchen's Töröö.

Donnelly also writes poetry.

In 2001, Donnelly wrote the script to the German 2002 film Bibi Blocksberg.

In 2003, this was followed by Bibi Blocksberg und das Geheimins der blauen Eulen with Marie Luise Stahl as Elea as the second major character. In both films, Sidonie von Krosigk played Bibi and Katja Riemann, Ulrich Noethen, Corinna Harfouch had other major roles.

In 2005 and 2006, Donnelly wrote the script to the third Bibi Blocksberg film, and together with her husband Paul Arató, she wrote the film scripts Emma Panther and Der kleine Medicus (not finished yet) - both family entertainment films. Also in 2006, Donnelly wrote the script to the romantic dramedy film Töne aller Arten based on the book by Peter Trabert.

Currently the author couple Donnelly-Arató are working on a new multimedia character for children.

In adult literature, Donnelly has written two detective books for Piper Verlag: Kein einziges Wort and Wen der Tod entlässt. Both books star a German-Austrian female funeral parlor owner with a fondness for tango. For unknown reasons, critics have mainly ignored these books. ORF is planning a TV series based on the books. Für Paare verboten, published by Hoffmann und Campe, is a caricature of the tantra therapy scene. Donnelly has also written an amusing travel guide Gebrauchsweisung für Mallorca (2002). Glasauge is Donnelly's autobiography. Wendelburgs Komplott and Die Hühnerleiter ins Nirvana are books-on-demand.

Donnelly has also written the script for the film Apuena.