She attended Oak Grove School for Girls in Maine. After graduating from Connecticut College in 1949, Parsons initially studied law at Boston University, and then worked as a singer with a band before settling on an acting career in the early 1950s. In 1983, when co-starring with fellow Academy Award-winning actor Jack Lemmon in a new Ernest Thompson stage play in Los Angeles, Parsons appeared on the November 1 episode of The Tonight Show, telling Johnny Carson that Lemmon had been her first boyfriend, when they were both teenagers in the 1940s.

Parsons married author Richard Gehman in 1953. They had twin daughters, reporter Abbie and actress Martha Gehman, before divorcing in 1958. Her grandson, Abbie’s son, is former Chicago Bears and Jacksonville Jaguars guard/tackle, Eben Britton, named for his great-grandfather, Estelle’s father. In January 1983 she married her partner of 10 years, Peter Zimroth, who has served as Assistant U.S. Attorney, Assistant District Attorney and court-appointed monitor of the NYPD’s policies and practices regarding stop-and-frisk. Their marriage honoured the pending adoption of their child, son Abraham (born February 1983).

Moving to New York City, Parsons worked as a writer, producer and commentator for The Today Show. She made her Broadway debut in 1956 in the ensemble of the Ethel Merman musical Happy Hunting. She began performing Off-Broadway in 1961, and received a Theatre World Award in 1963 for her performance in Whisper into My Good Ear/Mrs. Dally Has a Lover (1962).

In 1964, Parsons won an Obie Award for Best Actress for her performance in two Off-Broadway plays, Next Time I’ll Sing to You and In the Summer House. In 1967, she starred with Stacy Keach in the premiere of Joseph Heller’s play We Bombed in New Haven at the Yale Repertory Theater.

Parsons has received Tony Award nominations for her work in The Seven Descents of Myrtle (1968), And Miss Reardon Drinks a Little (1971), Miss Margarida’s Way (1978), Morning’s at Seven (2002), and The Velocity of Autumn (2014). She played Leokadia Begbick in the American premiere of the Weill–Brecht opera, Rise and Fall of the City of Mahagonny (1970), and performed as Mrs. Peachum to Lotte Lenya’s Jenny in Threepenny Opera on tour and in New York City. In 1978 she played Lady MacBeth in the Kauai Community Players production. She also played Ruth in Gilbert & Sullivan’s The Pirates of Penzance on Broadway in 1981. From June 17, 2008 through May 17, 2009, she played the role of Violet Weston in August: Osage County. She continued playing the role during the show’s national tour beginning July 24, 2009, in Denver.

As a director, Parsons has a number of Broadway credits, including a production of Romeo and Juliet, Macbeth and As You Like It in 1986. Off-Broadway, she directed Dario Fo’s Orgasmo Adulto Escapes from the Zoo (1983). She served as the Artistic Director of the Actors Studio for five years, ending in 2003.

In 2004, Parsons was inducted into the American Theatre Hall of Fame.

She was honored with a Woman of Achievement Award from the Women’s Project Theater in 2009. In 2010, she appeared in London, playing psychic Helga ten Dorp in Deathtrap at the Noël Coward Theatre in the West End.

In 2016, she starred in Israel Horovitz’s new play Out Of The Mouths Of Babes along with Judith Ivey directed by Barnet Kellman at The Cherry Lane Theater in New York City.

In April 2018, Parsons returned to television reprising her role as Beverly Harris, mother of Roseanne Barr’s title character, in season 10, episode 5 of Roseanne.