Molina was born Alfredo Molina in Paddington, London. His father, Esteban, was a Spaniard from Madrid who worked as a waiter and chauffeur, while his mother, Giovanna, was an Italian house-keeper who cleaned rooms in a hotel and worked as a cook. Molina grew up in a working class neighbourhood in Notting Hill that was inhabited by many other immigrant families. He decided to become an actor after seeing Spartacus at the age of nine, and attended the Guildhall School of Music and Drama.

In 1978, Molina starred with Leonard Rossiter in the sitcom The Losers. Molina made his film debut with a minor role in the 1981 movie Raiders of the Lost Ark as Indiana Jones' ill-fated guide during its iconic opening sequence. However, his big break came with Letter to Brezhnev in 1985, which he followed up with a starring role in Prick Up Your Ears in 1987, playing Joe Orton's lover Kenneth Halliwell. He was cast in a lead role in the Red Dwarf TV series, but was replaced by another actor.

Molina starred in the first two series of El C.I.D. but left to concentrate on his film work. Subsequent films included Species, Dudley Do-Right, Chocolat, Not Without My Daughter, and Enchanted April. With a flawless mid-western American accent, Molina starred alongside Betty White in the US television series "Ladies Man", which ran from 1999–2001.

He has worked twice with Paul Thomas Anderson, first in Boogie Nights and then Magnolia. In 2002, Molina gained wide recognition for his portrayal of Mexican muralist Diego Rivera alongside Salma Hayek in the biopic Frida, a role which garnered him BAFTA and SAG award nominations. In 2003, he played himself alongside Steve Coogan in Coffee and Cigarettes. In 2004, Molina gained further commercial recognition when he was cast as the villain Doctor Octopus in Spider-Man 2, which went on to become one of the highest-grossing films of that year. He later reprised his role of Doctor Octopus in the video game adaption of Spider-Man 2 and archive footage of Molina as Doctor Octopus is seen in the opening of Spider-Man 3. In 2006, Molina portrayed Touchstone in Kenneth Branagh's film version of Shakespeare's As You Like It and appeared in Ron Howard's adaptation of The Da Vinci Code. Molina provided the voice of the villain Ares in the 2009 animated Wonder Woman film.

Molina's stage work has included two major Royal National Theatre productions, Tennessee Williams' The Night of the Iguana (as Shannon) and David Mamet's Speed the Plow (as Fox). In his Broadway debut, Molina performed in Yasmina Reza's Tony Award-winning play 'Art', for which he received a Tony nomination in 1998. In 2004, Molina returned to the stage, starring as Tevye in the Broadway production of Fiddler on the Roof. For his performance he once again received a Tony Award nomination, this time for Best Actor in a Musical. Molina received his third Tony Award nomination for "Red" in 2010, for Best Performance by a Leading Actor in a Play.

In 2007, Molina narrated a 17-part original audiobook for Audible.com called The Chopin Manuscript. This serialized novel was written by a team of 15 best-selling thriller writers, including Jeffery Deaver, Lee Child, Joseph Finder and Lisa Scottoline.

On April 1, 2010 he opened at Broadway's John Golden Theater in the role of artist Mark Rothko in John Logan's drama "Red" opposite Eddie Redmayne for a limited engagement through June 27. He had played the role to much critical success at the Donmar Warehouse in London in December 2009.

In 2010 he will star opposite Dawn French in the six-part BBC sitcom Roger and Val Have Just Got In.

He is the only actor to have three Lego Minifigures modelled after him, with them being Doctor Octopus from Spider-Man, Satipo from Indiana Jones and Sheik Amar from Prince of Persia.[citation needed]

Molina resides in Los Angeles and has become a U.S. citizen. He is fluent in Spanish.