Palekar made his debut in 1971 with the Marathi film Shantata! Court Chalu Aahe directed by Satyadev Dubey, which started the New Cinema Movement in Marathi. In 1974 he was cast as an actor by Basu Chatterjee in Rajnigandha, and in the surprise low-budget hit, Chhoti Si Baat. This led to many other such roles in “middle-class” comedies, mostly alternative. These were mostly directed by Chatterjee or Hrishikesh Mukherjee and included films such as Gol Maal and Naram Garam. He won the Filmfare Best Actor Award for Gol Maal.

Palekar began in Marathi experimental theatre with Satyadev Dubey, and later started his own group, Aniket, in 1972. As a theatre actor, he was part of popular plays like Shantata! Court Chalu Aahe, Hayavadana and Adhe Adhure. Following a performance on stage at the National Centre for the Performing Arts (NCPA) in 1994, he returned to theatre after a gap of 25 years with the suspenseful play, Kusur (The Mistake). This play is directed by him and he also plays the lead role.

In 1979, he was paired with a sixteen-year-old Sridevi in Solva Saawan, which was her debut Hindi movie as a heroine. Amol played the role of an intellectually disabled man, a character played by Kamal Haasan in the original Tamil movie.

In 1982 he played the role of Ravi in the Malayalam movie Olangal. He turned to directing with the Marathi film Aakriet. He showed his capabilities as a director with movies such as Thodasa Roomani Ho Jaayen and Paheli. Thodasa Roomani Ho Jaayen has become a part of management courses and study pertaining to human behaviour. Paheli was India’s official entry for Best Foreign Film at the 2006 Oscars. The movie, however, did not make it to the final nominations.