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Phillips was born as Lou Diamond Upchurch at the Subic Bay Naval Station in the Philippines, the son of Lucita and Gerald Upchurch, a naval officer. His father was an American of Scottish-Irish, Hawaiian, and Cherokee descent and his mother was a Filipina of Spanish, Chinese, and Japanese descent. Phillips was named after Marine legend Lou Diamond and adopted his surname, "Phillips," from his stepfather.

The first low-budget films in which he starred in were called Trespasses. Phillips' big break came with the starring role in 1987's La Bamba as early rocker Ritchie Valens. Though the role garnered him praise from critics, he has since found it difficult to find another leading role in a big-budget Hollywood film. In 1988, he co-starred along Edward James Olmos in the inner-city high school drama, Stand and Deliver. He plays Angel Guzman, a wannabe cholo gangster who is inspired by his math teacher, Jaime Escalante, to challenge himself at calculus; and along the road, creates a friendship with his teacher. Stand and Deliver was actually filmed before La Bamba, but was released the year after. In 1988 and 1990, Phillips co-starred with Emilio Estevez and Kiefer Sutherland in the cowboy movies Young Guns and Young Guns II.

In 1996, Phillips made his Broadway debut as the King in Richard Rodgers and Oscar Hammerstein II's The King and I. Phillips won a Theatre World Award and was nominated for both a Tony Award and a Drama Desk Award for his performance.

In 1998 he starred as Cisco, the counterpart of the main character Melvin Smiley (played by Mark Wahlberg, launching his career) in the comedy-action movie The Big Hit.

On September 11, 2007, Phillips joined the touring troup for Lerner and Loewe's Camelot in the role of King Arthur. He also played a role in the first season of the TV series "24" as secret government agent Mark DeSalvo.

Phillips plays the recurring role of FBI agent Ian Edgerton in the television series Numb3rs. Edgerton is the FBI's best tracker and sniper, working as a sniper instructor at Quantico FBI Academy when he is not working a case in the field.

During the making of Trespasses, he met Julie Cypher, an assistant director who would become his wife on September 17, 1987. They later divorced on August 5, 1990; Cypher left him to start a relationship with rocker Melissa Etheridge. He met Jennifer Tilly, to whom he was briefly engaged, although the two never married. He later married model Kelly Phillips. They have three daughters: twins Grace Moorea and Isabella Patricia (born 1997), and Lili Jordan (born 1999). They separated in 2004 and their divorce was finalized in July 2007. He married Yvonne Marie Boismier less than a month later and their first child, daughter Indigo Sanara, was born in October 2007.

Phillips plays on the World Poker Tour in the Hollywood Home games. He plays for the Sierra Canyon H.S. & Santa Suzanna Montessori charity.

On Friday, August 11, 2006, Phillips was arrested for alleged domestic violence at his Los Angeles home following a dispute with his girlfriend (later wife), makeup artist Yvonne Boismier. In December, he pleaded no contest to a misdemeanor count of domestic battery, and was sentenced to three years' probation. He also was ordered to undergo one year of domestic violence counseling and to serve 200 hours of community service.

In an interview titled "Shine on Lou Crazy Diamond" in Smash Hits magazine, Phillips revealed that his favorite band is Pink Floyd, and that his favorite song is "Shine On You Crazy Diamond".

Phillips speaking at the Filipino American Library Spirit Awards and Dinner GALA in Los Angeles in October 2006.

Phillips is an outspoken, long-time advocate of HR 4574, the Filipino Veterans Equity Act of 2006, legislation which would honor the service of Filipino World War II veterans by granting them the same benefits made available to other U.S. World War II veterans.