Shannon was born in Pine Bluff, Arkansas in 1907 (some sources erroneously cite 1909 or 1910) to Edward and Nannie Sammon. She had a younger sister, Carol. She attended Annunciation Academy Catholic School and Pine Bluff High School and then was hired as a chorus girl by Florenz Ziegfeld while visiting her aunt in New York in 1923. The following year, she was cast in the Ziegfeld Follies followed by a role in Earl Carroll’s Vanities. While on Broadway in 1927, she was spotted by B.P. Schulberg, production head of Paramount Pictures, and was offered a contract. When she arrived in Hollywood, she was hailed as the next “It girl”, replacing Clara Bow. Before the shooting of The Secret Call, Bow had suffered a nervous breakdown, and Shannon was hired to replace her only two days after her arrival in Hollywood.

In 1926, Shannon married her first husband, actor Alan Davis. The marriage ended in July 1940. She married second husband, cameraman Albert G. Roberts, later that year.

Shannon sometimes worked 16-hour days (from 10 a.m. to 4 a.m. the next day) while shooting a film, and when shooting wrapped, rushed to begin another film. She occasionally worked on two separate films in one day. Through films and publicity, Shannon became known as a fashion plate, wearing styles three months before they became popular. In 1932, she signed a new contract at Fox and became known as difficult and temperamental on the set and was rumored to have had a drinking problem. In 1934, Shannon returned to New York City to do the Broadway show,Page Miss Glory.

In 1935, she continued on Broadway with The Light Behind the Shadow, but was soon replaced, with a press release claiming a tooth infection, though rumors claimed it was her drinking. In 1936, she returned to Hollywood with Youth on Parole. She found it harder to conceal her drinking. Fewer movie roles were offered, and her drinking worsened. She made her last film appearance in the 1940 film Triple Justice, opposite George O’Brien.

On May 11, 1941, Shannon’s husband Albert Roberts and a fellow studio worker returned from a fishing trip to find Shannon dead in their North Hollywood apartment. She was slumped over the kitchen table, a cigarette in her mouth and an empty glass in her hand. She had been dead for approximately 12 hours. An autopsy revealed that she had died of a heart attack brought on by a liver ailment and a run-down condition. She is interred at Hollywood Forever Cemetery. Three weeks after Shannon’s death, her husband committed suicide by shooting himself with a .22 rifle in the same chair in which she had died. His suicide note read “I am very much in love with my wife, Peggy Shannon. In this spot she died, so in reverence to her, you will find me in the same spot.”