Margaret Webster was born in New York City, the daughter of two well-known British actors, Dame May Whitty and her husband Ben Webster. She spent much of her childhood in England and went to work for the Old Vic theatre company in 1929. She also worked for several other established theatre companies. In 1937, she returned to the USA and directed a production of Shakespeare's Richard II starring Maurice Evans. She also directed Evans in Broadway productions of Hamlet, Twelfth Night and Henry IV, Part I. While she was directing Hamlet in 1938, she began a long romantic relationship with actress Eva Le Gallienne. Margaret Webster became a groundbreaking stage and opera director.
In 1942, she published her first book, Shakespeare Without Tears. In 1943, she directed a landmark production of Othello starring Paul Robeson, with herself as Emilia, which some consider her greatest triumph. In 1945, she staged the longest-running performance of The Tempest ever to play Broadway. In 1946, she and Le Gallienne co-founded the American Repertory Theater. Its productions included a now-legendary version of Alice in Wonderland in which Margaret played both the Cheshire Cat and the Red Queen. She founded her own company, the Margaret Webster Shakespeare Company, which went on tour around the USA in 1948. In 1950, she became the first woman to direct the New York Metropolitan Opera. Her career suffered when she was named to the House Un-American Activities Committee in 1951, even though she was eventually cleared of all charges. In the 1960s, she divided her time between various universities, where she taught and staged plays, and performances of her one-woman show. Her autobiography, Don't Put Your Daughter on the Stage, was published in 1972.