Muler-Stahl was born in Tilsit, East Prussia, Germany (now Sovetsk, Russia), the son of Editta and Alfred Mueller-Stahl, a bank teller. He was a noted concert violinist while he was a teenager. He turned to film acting in East Berlin in 1950.

He was a successful film and stage actor in East Germany, starring in films such The Third and Jacob, the Liar. After protesting against Wolf Biermann's denaturalisation in 1976 he was blacklisted by the government and emigrated to West Germany in 1980. Mueller-Stahl's talent found ample work in the West German film industry. He appeared in such films as Rainer Werner Fassbinder's Lola (1981), Veronika Voss (1982), Andrzej Wajda's A Love in Germany (1984), Angry Harvest and Colonel Redl (both 1985), the latter about Alfred Redl.

Mueller-Stahl broadened his film career with his US film debut as Jessica Lange's father in Music Box (1989). He subsequently took strong character roles in Kafka by Steven Soderbergh and Night on Earth by Jim Jarmusch (both 1991). He is also remembered for his role as the Soviet general in charge of the occupied United States in the ABC television miniseries Amerika (1987). Mueller-Stahl's leading role in Avalon (1990) is also memorable.

Mueller-Stahl won the Silver Bear for Best Actor in the 1992 Berlinale for his performance in Utz. He received an Oscar nomination for Best Supporting Actor for his performance in Shine (1996). Mueller-Stahl was also in A Pyromaniac's Love Story (1995) and the 1997 remake of the movie 12 Angry Men. Conversation with the Beast (1996) was his first film as director. In 1998, he played the German scientist and syndicate member, Conrad Strughold, in the feature film The X-Files.

In the early 2000s, Mueller-Stahl gained applause for his portrayal of Thomas Mann in a German historic film production about the Mann family (Thomas Mann, his brother Heinrich Mann, and others) called Die Manns - Ein Jahrhundertroman. In 2004, Mueller-Stahl made another rare foray into American television, guest-starring in four episodes on the television drama series The West Wing as the Prime Minister of Israel. He starred in David Cronenberg's 2007 crime/drama Eastern Promises and has been attached to the upcoming film "The International".

The year 2007 saw Armin Mueller-Stahl as an artist, when the new Brockhaus encyclopedia was presented at the Frankfurt Book Fair with book covers and spines designed by him.

In 2008, he won the Genie Award for Best Performance by an Actor in a Supporting Role for Eastern Promises.

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