Terzani was born in Florence to poor working class parents. He attended the University of Pisa as a law student and pupil of Collegio Medico-Giuridico (now Sant'Anna School of Advanced Studies). After graduating, he worked for Olivetti, the office equipment producer. In 1965 he went on a business trip to Japan. This was his first contact with Asia and his first step towards his decision to change his life radically and explore Asia. During these years he again began writing for l'Astrolabio. He then resigned from Olivetti and moved to Columbia University in order to study Chinese language and culture.
After a first stint as journalist within Italo Pietra's Il Giorno, in 1971 he moved to Singapore as a reporter, with his wife and their two small children, as the Asian correspondent for the German weekly Der Spiegel. He then offered his collaboration to the Italian daily newspapers Corriere della Sera and La Repubblica. In the meantime, on a semi-secret level, he sent regular information about East Asian politics to the Banca Commerciale Italiana, which was headed by Raffaele Mattioli.
Terzani knew much about the historical and political background of Asia, but had also a deep interest in the philosophical aspects of Asian culture. Though an unbeliever, he always looked in his journeys for the spiritual aspects of the countries he was visiting. He lived in Beijing, Tokyo, Singapore, Hong Kong, Bangkok and New Delhi which became his second home. His stay in Beijing came to an end when he was arrested and expelled from the country for "counter-revolutionary activities". Based on his experiences, he wrote La Porta Proibita (Behind The Forbidden Door), a highly critical book about post-Maoist China. While staying in Hong Kong working as a journalist, he had a name in Chinese, ???deng4 tian1 nuo4 (meaning: "heavenly/godly promise"). He stopped using this name after an unpleasant incident in China in 1984.
Terzani's experiences in Asia are described in articles and essays in newspapers, as well as in the several books that he wrote. In his first book, Pelle di leopardo (Leopard Skin) (1973), he describes the last phases of the Vietnam war. Two years later he would face death when trying to document the new Democratic Kampuchea: the Khmer Rouge wanted to shoot him after his arrival in the border town of Poipet, and he saved his life only by his knowledge of the Chinese language. In what is perhaps his most well-known book, Un indovino mi disse (A Fortune-Teller Told Me), Terzani describes his travels across Asia by land and sea following the advice and warning from a fortune teller in Hong Kong that he avoid airplanes for a year. One chapter of the book is entirely dedicated to Ferdynand Ossendowski, Polish traveller. Ryszard Kapu?ci?ski wrote about this book "A great book written in the best traditions of literary journalism... profound, rich and reflective". Kapu?ci?ski and Terzani shared the same vision of journalism. 
In 1997, Terzani received the Luigi Barzini Prize for his activities as a reporter. After 9/11 he wrote Lettere contro la guerra (Letters Against the War). The book was born as a response to the anti-Islamic invectives published by the Italian journalist and author Oriana Fallaci on the daily Il Corriere della Sera on 29 September 2001.
In his last book Un altro giro di giostra (One More Ride on the Merry-go-round), Terzani deals with his illness, (a tumor) which eventually led to his death, but not before he had travelled and searched through countries and civilizations, looking for a cure for his cancer and for a new vision of life. A short excerpt from his book:"...after a while, the goal of my journey was not the cure for my cancer anymore, bur for the sickness which affects all of us: mortality"He spent the last months of his life in Orsigna, a little village in the Apennine mountains in the province of Pistoia that he considered "his true, last love".
Terzani died on 28 July 2004. His last memories are recorded in an interview for Italian television entitled "Anam", an Indian word that literally means "the one with no name", an appellative he gained during an experience in an ashram in India.
His testament-book La fine è il mio inizio (The End Is My Beginning), authored with his son Folco, was published posthumously in March 2006 and sold 400,000 copies in 4 months. Its New Age theme has been attacked by Roman Catholic sources such as the newspaper Avvenire.  However Terzani in Un altro giro di giostra is sceptical about the New Age.
It has been announced that a movie will be shot about Terzani's life, based on La fine è il mio inizio. Terzani will be played by Bruno Ganz.
His books are being translated to many languages: German, French, Polish, Spanish, Portuguese, Dutch, Turkish, Slovenian, Japanese, Chinese and by publishers from India (English), Thailand (English), Brazil (Portuguese) and Argentina (Spanish).
Terzani was accused to have purposedly ignored the atrocities carried out by the Khmer Rouge for ideological reasons, as a correspondent in Cambodia in the mid-1970s. Despite him apologizing some years later, this controversy has not yet been soothed.