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Palmer, who took her surname from an English actress she admired, was one of three daughters born to Dr. Alfred Peiser, a German Jew surgeon, and Rose Lissman, an Austrian Jewish stage actress in Posen, Prussia, Germany (now Pozna?, Poland). When Lilli was four her family moved to Berlin-Charlottenburg. She studied drama in Berlin before fleeing to Paris in 1933 following the Nazi takeover. While performing in cabarets, she attracted the attention of British talent scouts and was offered a contract by the Gaumont Film Company. She made her screen debut in Crime Unlimited (1935) and appeared in British films for the next decade.

In 1943, she married actor Rex Harrison and followed him to Hollywood in 1945. She signed with Warner Brothers and appeared in several films, notably Cloak and Dagger (1946) and Body and Soul (1947). She also periodically appeared in stage plays as well as hosting her own television series in 1951. Harrison and Palmer appeared together in the hit Broadway play Bell, Book and Candle in the early 50s and later starred in the film version of The Four Poster (1952), which was based on the award-winning Broadway play of the same name, written by Jan de Hartog. She won the Volpi Cup for Best Actress in 1953 for The Four Poster. Harrison and Palmer divorced in 1956; they had one son, Carey Harrison, born in 1944. During the marriage, Harrison had many affairs, including one with Carole Landis, who committed suicide in 1948 in the wake of their failed relationship.

Palmer returned to Germany in 1954 where she played roles in many films and television productions. She also continued to play both leading and supporting parts in the U.S. and abroad. In 1957, she won the Deutscher Filmpreis for Best Actress for her portrayal of Anna Anderson in Is Anna Anderson Anastasia?. She starred opposite William Holden in The Counterfeit Traitor, an espionage thriller based on fact, (1962), and opposite Robert Taylor in another true World War II story, Disney's Miracle of the White Stallions (1963). On the small screen, in 1974 she starred as Manouche Roget in the six-part television drama series The Zoo Gang, about a group of former underground freedom fighters from World War II, with Brian Keith, Sir John Mills, and Barry Morse.

A talented writer, Palmer published a memoir, Change Lobsters and Dance, in 1975. Reminiscences by Vivian Matalon and Noël Coward (Matalon directed Palmer in the premiere production of Coward's play Suite in Three Keys in 1966; see A Song at Twilight) suggest that Palmer was not always the patient and reasonable person she represented herself as being in this autobiography. She wrote a full-length work of fiction presented as a novel rather than a memoir, The Red Raven in 1978.

Palmer was married to Argentine actor Carlos Thompson from 1957 until her death in Los Angeles from cancer in 1986 at the age of 71.

Lilli Palmer is interred at Forest Lawn Memorial Park, Glendale, California.

• Crime Unlimited (1935)
• The First Offence (1936)
• Wolf's Clothing (1936)
• Secret Agent (1936)
• Good Morning, Boys (1937)
• Sunset in Vienna (1937)
• The Door with Seven Locks (1940)
• Thunder Rock (1942)
• The Gentle Sex (1943)
• The Rake's Progress (1945)
• Cloak and Dagger (1946)
• No Minor Vices (1948)
• Body and Soul (1947)
• The Long Dark Hall (1951)
• The Four Poster (1952)
• Feuerwerk (1954)
• Der Teufel in Seide (1955)
• Anastasia ... Die letzte Zarentochter (1956)
• The Lovers of Montparnasse (Les Amants de Montparnasse) (1958)
• Mädchen in Uniform (Girls in Uniform) (1958)
• But Not for Me (1959)

• Conspiracy of Hearts (1960)
• The Pleasure of His Company (1961)
• The Counterfeit Traitor (1962)
• Adorable Julia (1962)
• Miracle of the White Stallions (1963)
• Operation Crossbow (1965)
• The Amorous Adventures of Moll Flanders (1965)
• Jack of Diamonds (1967)
• Nobody Runs Forever (1968)
• Sebastian (1968)
• De Sade (1969)
• La residencia (1969)
• Children of Mata Hari (1970)
• Eine Frau bleibt eine Frau (1970, ZDF TV)
• The Other Side of the Wind (1972) (unreleased)
• Lotte in Weimar (1974)
• Derrick - Season 1, Episode 2 - "Johanna" (1974)
• The Boys from Brazil (1978)
• The Holcroft Covenant (1985)