Nestle's father died before she was born, and she was raised by her widowed mother Regina Nestle, a bookkeeper in New York City's garment district, whom she credits with inspiring her "belief in a woman's undeniable right to enjoy sex". She attended Martin Van Buren High School in Queens and received her B.A. from Queens College in 1963. During the mid-1960s she became involved in the African-American Civil Rights Movement, travelling to the Southern United States to join the Selma to Montgomery march and to participate in voter registration drives. She earned a Master's degree in English from New York University in 1968 and worked toward a doctorate for two years before returning to Queens College to teach.
Nestle had been part of the working-class, butch and femme bar culture of New York City since the late 1950s. In an interview with Ripe Magazine, she recalled that the center of her social life as a young lesbian was a bar called the Sea Colony, which, typically for the time, was run by organized crime and that, in an attempt to avoid raids by the vice squad, allowed only one woman into the bathroom at a time:
The bathroom line went from the back room through a narrow hallway to the front room to the toilet which was behind the bar. This butch woman would stand at the front of the line and we each got two wraps of toilet paper.... It took me a long time to realize that while I was fighting for all these other causes, that it wasn't okay for me to get my allotted amount of toilet paper.
After the Stonewall riots in 1969, gay liberation became a focus of her activism. She joined the Lesbian Liberation Committee in 1971 and helped found the Gay Academic Union (GAU) in 1972. The following year, she and other members of the GAU began to gather and preserve documents and artifacts related to lesbian history. This project became the Lesbian Herstory Archives, which opened in 1974 in the pantry of the apartment she shared with her then-partner Deborah Edel and moved to a brownstone in Park Slope, Brooklyn in 1992. Today its holdings include more than 20,000 books, 12,000 photographs, and 1,600 periodical titles.
Nestle began writing fiction in 1978, when a prolonged illness prevented her from teaching for a year. Her erotica focusing on butch and femme relationships made her a controversial figure during the feminist sex wars of the 1980s; members of Women Against Pornography called for censorship of her stories. In her political writings, Nestle, a self-identified femme, argued that contemporary feminism, in rejecting butch and femme identities, was asking her to repress an important part of herself. She said she "wanted people, especially lesbians, to see that the butch-femme relationship isn't just some negative heterosexual aping". Her writings on the subject were highly influential; Lillian Faderman describes her as the "midwife" to a revised view of butch and femme, and her 1992 anthology The Persistent Desire: A Femme-Butch Reader became the standard work in its field.
She retired from Queens College in 1995 due to an illness that was eventually identified as colorectal cancer. She was diagnosed with breast cancer in 2001. She now lives in Australia with her partner, law professor Dianne Otto, and teaches at the University of Melbourne.
Her life was the subject of a 2002 documentary by Joyce Warshow entitled Hand on the Pulse.