Millhauser was born in New York City, grew up in Connecticut, and earned a B.A. from Columbia University in 1965. He then pursued a doctorate in English at Brown University. He never completed his dissertation but wrote parts of Edwin Mullhouse and From the Realm of Morpheus in two separate stays at Brown. Between times at the university, he wrote Portrait of a Romantic at his parents' house in Connecticut. His story "The Invention of Robert Herendeen" (in The Barnum Museum) features a failed student who has moved back in with his parents; the story is loosely based on this period of Millhauser's life.
Until the Pulitzer Prize, Millhauser was best known for his 1972 debut novel, Edwin Mullhouse. This novel, about a precocious writer whose career ends abruptly with his death at age eleven, features the fictional Jeffrey Cartwright playing Boswell to Edwin's Johnson. Edwin Mullhouse brought critical acclaim, and Millhauser followed with a second novel, Portrait of a Romantic, in 1977, and his first collection of short stories, In The Penny Arcade, in 1986.
Possibly the most well-known of his short stories is "Eisenheim the Illusionist" (published in "The Barnum Museum"), based on a pseudo-mythical tale of a magician who stunned audiences in Vienna in the latter part of the 19th century. It was made into the film, The Illusionist (2006).
Millhauser's stories often treat fantasy themes in a manner reminiscent of Poe or Borges, with a distinctively American voice. As critic Russell Potter has noted, "in (Millhauser's stories), mechanical cowboys at penny arcades come to life; curious amusement parks, museums, or catacombs beckon with secret passageways and walking automata; dreamers dream and children fly out their windows at night on magic carpets."
Millhauser's collections of stories continued with The Barnum Museum (1990), Little Kingdoms (1993), and The Knife Thrower and Other Stories (1998). The unexpected success of Martin Dressler in 1997 brought Millhauser increased attention. Dangerous Laughter: Thirteen Stories made the New York Times Book Review list of "10 Best Books of 2008" .
Millhauser lives in Saratoga Springs, New York and teaches at Skidmore College.