Dakota Fanning was born in Conyers, Georgia, the daughter of Joy (née Arrington), who played tennis professionally, and Steve Fanning, who played minor league baseball for the St. Louis Cardinals and now works as an electronics salesman in Los Angeles Her maternal grandfather is football player Rick Arrington and her aunt is ESPN reporter Jill Arrington. Dakota is the older sister of Elle Fanning, also an actress. Dakota's father had wanted to name her "Dakota" and her mother wanted to name her "Hannah". Dakota is of half German descent and her last name is of Irish origin. Dakota and her family are members of the Southern Baptist Convention. Dakota attends Campbell Hall School in North Hollywood, California and is on the varsity cheerleading squad.

Fanning began acting at the age of five after appearing with Ray Charles in a television commercial for the state lottery and being chosen for a Tide commercial. Her first significant acting job was a guest-starring role in the NBC prime-time drama, ER, which remains one of her favorite roles ("I played a car accident victim who has leukemia. I got to wear a neck brace and nose tubes for the two days I worked.") Fanning subsequently had several guest roles on established television series, including CSI: Crime Scene Investigation, The Practice, Spin City. She also portrayed the title characters of Ally McBeal and The Ellen Show as young girls. In 2001, Fanning was chosen to star opposite Sean Penn in I Am Sam, the story of a mentally retarded man who fights for the custody of his daughter (played by Fanning). This role made Fanning the youngest person (in 2002, at age eight) ever to be nominated for a Screen Actors Guild Award, for her supporting performance. When she won the Best Young Actor/Actress award from the Broadcast Film Critics Association for the film, she was too short to reach the microphone; presenter Orlando Bloom held her up for the duration of her acceptance speech.

In 2002, director Steven Spielberg cast Fanning in the lead child role of Allison "Allie" Clarke/Keys in the science fiction miniseries Taken. By this time, she had received positive notices by several film critics, including Tom Shales of The Washington Post, who wrote that Fanning "has the perfect sort of otherworldly look about her, an enchanting young actress called upon ... to carry a great weight." In the same year, Fanning appeared in three films; as a kidnap victim who proves to be more than her abductors bargained for in Trapped; as the young version of Reese Witherspoon's character in Sweet Home Alabama, and as Katie in the movie Hansel and Gretel. Fanning was featured even more prominently in two films released in 2003; playing the uptight child to Brittany Murphy's immature nanny in Uptown Girls, and as Sally in The Cat in the Hat. Fanning did voice-over work for four animated projects during this period; as Satsuki in Disney's English language release of My Neighbor Totoro, as Kim Possible in preschool in the Disney Channel series Kim Possible, as a little girl in the Fox series Family Guy, and as young Wonder Woman in an episode of Cartoon Network's Justice League.

In 2004, Fanning appeared in Man on Fire as Pita, a nine-year-old who wins over the heart of a retired mercenary (Denzel Washington) hired to protect her from kidnappers. Roger Ebert wrote that Fanning "is a pro at only 10 years old, and creates a heart-winning character." Hide and Seek, was her first release in 2005, opposite Robert De Niro. The film was generally panned, and critic Chuck Wilson called it "a fascinating meeting of equals — if the child star [Fanning] challenged the master [De Niro] to a game of stare-down, the legend might very well blink first." Fanning voiced Lilo (succeeding Daveigh Chase) in the direct-to-video film Lilo & Stitch 2: Stitch Has a Glitch. She also had a small part in the Rodrigo Garcia film Nine Lives (released in October 2005), in which she shared an unbroken nine-minute scene with actress Glenn Close, who had her own praise for Fanning: "She's definitely an old soul. She's one of those gifted people that come along every now and then."

Fanning completed filming on Dreamer: Inspired by a True Story (opposite Kurt Russell) in late October 2004. Russell declared he was astonished by his co-star's performance in the film. Russell, 54, who plays her father in the movie, says, "I guarantee you, (Dakota) is the best actress I will work with in my entire career." Kris Kristofferson, who plays her character's grandfather in the movie, said that she's like Bette Davis reincarnated. While promoting her role in Dreamer, Fanning became a registered member of Girl Scouts of the USA at a special ceremony, which was followed by a screening of the film for members of the Girl Scouts of the San Fernando Valley Council. She is not a member of a troop, but rather registered as a "Juliette" (GSUSA's title for independently registered girls). She then went directly to the set of War of the Worlds, starring alongside Tom Cruise. Released in reverse order (War in June 2005 and Dreamer in the following October), both films were critical successes. War director Steven Spielberg praised "how quickly she understands the situation in a sequence, how quickly she sizes it up, measures it up and how she would really react in a real situation." After filming was completed on War of the Worlds, Fanning moved straight to another film, without a break: Charlotte's Web, which she finished filming in May 2005, in Australia. Released on December 15, 2006, Web met generally warm critical acclaim. Producer Jordan Kerner said, "...when she was so caught up in War of the Worlds, we had to end up going on a search for other young actresses. They would have been nothing compared to her." Fanning also provided voice work for Coraline, scheduled for release sometime in 2008.

Over the summer of 2006, Fanning worked on the film Hounddog, described in press reports as a "dark story of abuse, violence and Elvis Presley adulation in the rural South." Fanning's parents have been criticized for allowing her to film a scene in which her character is raped. "It's not really happening," she told Reuters. "It's a movie, and it's called acting." Director Deborah Kampmeier addressed the controversy in the January 2007 edition of Premiere: "The assumption that [Dakota] was violated in order to give this performance denies her talent." In 2006, at the age of 12, she was invited to join the Academy of Motion Picture Arts and Sciences, becoming the youngest member in the Academy's history. In March and April 2007, she filmed Fragments/Winged Creatures, alongside Kate Beckinsale, Guy Pearce, Josh Hutcherson, and Academy Award winners Forest Whitaker and Jennifer Hudson. She plays Anne Hagen, a girl who witnesses her father's murder and who turns to religion in the aftermath. In July 2007, Fanning filmed for three days a short film titled Cutlass, one of Glamour's "Reel Moments" based on readers' personal essays. Cutlass was directed by Kate Hudson. From September to December 2007, Fanning filmed Push which centers on a group of young American expatriates with telekinetic and clairvoyant abilities who hide from a U.S. government agency in Hong Kong and band together to try to escape the control of the division. Dakota plays Cassie Holmes, a thirteen-year-old psychic.

In January 2008, Fanning began filming the movie adaptation of The Secret Life of Bees, a novel by Sue Monk Kidd. Set in South Carolina in 1964, the story centers on Lily Owens (Fanning), who escapes her lonely life and troubled relationship with her father by running away with her caregiver and only friend (played by Jennifer Hudson) to a South Carolina town where they are taken in by an eccentric trio of beekeeping sisters (played by Queen Latifah, Sophie Okonedo and Alicia Keys). Her movies Coraline and Push were released on the same day, February 6, 2009. In doing this movie Fanning shared her first real kiss with her co-star she spills at the premiere of the movie. Fanning has been cast as Jane in the upcoming film New Moon, the sequel to Twilight, based on the novel by Stephenie Meyer. Filming has finished for this project. She finished filming the movie The Runaways alongside Kristen Stewart, Stella Maeve, and Scout Taylor-Compton, where she plays Cherie Currie, the lead singer of the band. Fanning is currently filming Eclipse, the third book in the Twilight series. She will reprise her role as Jane.