Pagels was born in California, graduated from Stanford University (B.A. 1964, M.A. 1965) and, after briefly studying dance at Martha Graham's studio, began studying for her Ph.D. at Harvard University as a student of Helmut Koester. She married theoretical physicist Heinz Pagels in 1969. At Harvard, she was part of a team studying the Nag Hammadi library manuscripts. Upon finishing her Ph.D. from Harvard in 1970, she joined the faculty at Barnard College, where she headed the department of religion from 1974 until she moved to Princeton in 1982.

In 1975, after studying the Pauline Epistles and comparing them to Gnosticism and the early Church, Pagels wrote the book The Gnostic Paul. This book expounds the theory that Paul of Tarsus was a source for Gnosticism whose influence on the direction of the early Christian church was great enough to inspire the creation of pseudonymous writings such as the Pastoral Epistles (1st and 2nd Timothy and Titus), in order to make it appear as if Paul was anti-Gnostic.

Pagels' study of the Nag Hammadi manuscripts was the basis for The Gnostic Gospels (1979), a popular introduction to the Nag Hammadi library. The bestselling book won both the National Book Critics Circle Award and the National Book Award and was chosen by the Modern Library as one of the 100 best books of the twentieth century.

She follows the well-known thesis that Walter Bauer first put forth in 1934 and argues that the Christian church was founded in a society espousing a number of contradictory viewpoints. Gnosticism as a movement was not very coherent and there were several areas of disagreement among different factions. According to Pagels, Gnosticism attracted women in particular because of its egalitarian perspective, which allowed their participation in sacred rites.

In 1982, Pagels joined Princeton University as a professor of early Christian history. Aided by a MacArthur fellowship (1980–85), she researched and wrote Adam, Eve, and the Serpent, which examines the creation myth and its role in the development of sexual attitudes in the Christian West. In both The Gnostic Gospels and Adam, Eve, and the Serpent, Pagels focuses especially on the way that women have been viewed throughout Christian history.

In April 1987, Pagels' son Mark died after five years of illness, and in July 1988 her husband Heinz Pagels died in a mountain climbing accident. These personal tragedies deepened her spiritual awareness and led Pagels to begin the research leading to The Origin of Satan. This book argues that the figure of Satan became a way for orthodox Christians to demonize their religious opponents, namely, other Christian sects and Jews.

Her New York Times bestseller, Beyond Belief: The Secret Gospel of Thomas (2003), focuses on religious claims to possessing the ultimate truth. In it, Pagels contrasts the Gospel of Thomas with the Gospel of John, and argues that a close reading of the works shows that while the Gospel of John emphasizes that Jesus is the "light of the world", the Gospel of Thomas teaches individuals that "there is a light within each person, and it lights up the whole universe. If it does not shine, there is darkness." On Pagels' interpretation, the Gospel of Thomas reveals, along with other apocryphal teachings, that Jesus was not God but rather a teacher who sought to uncover the divine light in all human beings. Pagels argues that the Gospel of John was written as a reaction and rebuttal to the Gospel of Thomas. She bases this conclusion on her observation that, in the Gospel of John, the apostle Thomas is portrayed as a disciple of little faith who cannot believe without seeing and, moreover, that the Gospel of John places a very strong emphasis on accepting Jesus as the center of belief, which Pagels views as a hallmark of early orthodoxy. Beyond Belief also includes Pagels' personal exploration of the meaning of loss and tragedy.