Cary was born on October 29, 1918, in San Diego, California as Peggy-Jean Montgomery, the second daughter of Marian (née Baxter) and Jack Montgomery. While some sources incorrectly give her birth name as Margaret, Cary herself, in her autobiography, notes that she was indeed born as Peggy-Jean. She further explained the Roman Catholic nuns at her birth hospital recommended the name Margaret as Peggy was a pagan name. Her parents rejected the suggestion. Her elder sister, legally named Jack-Louise (1916–2005), was called Louise or occasionally Jackie.

Baby Peggy was “discovered” at the age of 19 months, when she visited Century Studios on Sunset Boulevard in Hollywood with her mother and a film-extra friend. Her father, Jack, a former cowboy and park ranger, had done work as a stuntman and stand-in for Tom Mix in a number of his cowboy movies. Impressed by Peggy’s well-behaved demeanor and willingness to follow directions from her father, director Fred Fishback hired her to appear in a series of short films with Century’s canine star Brownie the Wonder Dog. The first film, Playmates in 1921, was a success, and Peggy was signed to a long-term contract with Century.

Between 1921 and 1924, Peggy made close to 150 short comedy films for Century. Her movies often spoofed full-length motion pictures, social issues and stars of the era; in one, Peg O’ The Movies, she satirized both Rudolph Valentino and Pola Negri. She also appeared in film adaptations of novels and fairy tales, such as Hansel and Gretel and Jack and the Beanstalk, contemporary comedies, and a few full-length motion pictures.

In 1923, Peggy began working for Universal Studios, appearing in full-length dramatic films. Among her works from this era were The Darling of New York, directed by King Baggot, and the first screen adaptation of Captain January. In line with her status as a star, Peggy’s Universal films were produced and marketed as “Universal Jewels”, the studio’s most prestigious and most expensive classification. During this time, she also starred in Helen’s Babies, opposite Clara Bow.

Diana Serra Cary’s handprints and signature are preserved in cement outside the Vista Theater in East Hollywood. Baby Peggy’s film “Tips” was the first movie shown at the cinema when it opened in 1923.

Baby Peggy’s film career abruptly ended in 1925 when her father had a falling out with producer Sol Lesser over her salary and canceled her contract. She found herself essentially blacklisted due to actions of her father with his studio boss, and was able to land only one more part in silent films, a minor role in the 1926 picture April Fool.

From 1925 to 1929, Peggy had a successful career as a vaudeville performer. Although her routine, which included a comedy sketch, singing and a dramatic monologue, was initially met with skepticism, it soon became a popular and respected act. Although she was prohibited from “playing the Palace” because of her young age, she appeared onstage there as a special guest. Peggy and her family toured the United States and Canada, performing in major venues, until the family tired of touring.

The vast majority of Cary’s Baby Peggy films have not survived and records related to their production have been lost as well. Century Studios burned down in 1926. In addition, another older actress named Peggy Montgomery (1904–1989) was active in Hollywood Western films between 1924–29; her credits are occasionally confused with those of Baby Peggy. Filmographies at major websites are incomplete, and sometimes incorrect, because of these factors.

While under contract with Century and Universal, Peggy commanded an impressive salary. By 1923, she was signed to a $1.5 million a year contract at Universal ($22.4 million in 2019); on her vaudeville tours she made $300 per day. Her parents handled all of the finances and money was spent on expensive cars, homes, and clothing. Nothing was set aside for the welfare or education of Peggy or her sister. Peggy herself was paid one nickel for every vaudeville performance. Through reckless spending and corrupt business partners of her father, her entire fortune was gone before she hit puberty. When fellow child star Jackie Coogan sued his parents in 1938, Peggy’s parents asked her if she was going to do the same. Believing it would do no good, Peggy did not pursue legal action. Coogan’s case, and cases like Baby Peggy’s, eventually inspired the Coogan Act to protect child actors’ earnings.

Peggy posed for publicity photos with Douglas Fairbanks Sr., and signed with a new manager. Hopes of a comeback were mostly dashed by false rumors of a bad screen test that had never taken place. The family resorted to using food coupons from the Motion Picture Relief Fund. The Los Angeles School Board asserted that Peggy had to go to school, and was first enrolled at Lawlor Professional School, a school with flexible hours for child actors, and was classmates with Micky Rooney and Judy Garland. She later attended Fairfax High School while the entire family was forced to take extra work. She loathed screen work and retired soon after appearing in Having Wonderful Time in 1938.

Peggy married Gordon Ayres in 1938 and a few years later adopted the name Diana Ayres in an effort to distance herself from the Baby Peggy image. Working at the time as a writer for radio shows, she found that people who figured out her identity were more interested in her Baby Peggy persona than in her writing abilities. She later changed her name to Diana Serra Cary explaining, “After my divorce [from Gordon Ayres] and when I became a Catholic I took Serra as my confirmation name. When I married Bob [her second husband] I became Mrs. Cary.”

At the age of seventeen, trying to escape the film industry and her parents’ plans for her life, Cary ran away from home and rented an apartment with her sister Louise. She married actor Gordon Ayres, whom she met on the set of Ah, Wilderness!, in 1938. They divorced in 1948. In 1954, she married artist Robert “Bob” Cary (sometimes listed as Bob Carey). They had one son, Mark. They remained married until Cary’s death in 2001. She lived in Gustine, California, near Modesto, for many years. Cary died at her home in Gustine on February 24, 2020, at age 101.

On November 8, 2008, ten days after her 90th birthday, Cary was honored at the Edison Theatre in Niles, California, with a screening of two of her feature films, Helen’s Babies and Captain January.

Peggy’s parents continued to spend excessively after she had been pushed out of films, wasting on unnecessary luxuries much of the US$2 million she had made. Peggy’s father planned to buy a ranch and convert it into a high-end getaway. However, the stock market crash of 1929 put an immediate halt to the plans. The Montgomerys had to sell their Beverly Hills home and, having made a $75,000 deposit on the land and existing property, moved to rural Wyoming where they lived near the Jelm Mountains. Peggy found the change in pace refreshing and hoped her stage days were over. However, the family struggled to make a living, and, as a last-ditch effort, returned to Hollywood in the early 1930s, much to the teenaged Peggy’s chagrin. She stated in a 2012 interview that she was paid three dollars a day, and many of the other extras were other silent actor stars that she grew up with, and collectively they considered the work to be like that of “galley slaves”.

Since 2012, there have been attempts to get Cary a star on the Hollywood Walk of Fame through a crowdfunding campaign, but as of 2020 it has not yet succeeded. On December 3, 2012, Turner Classic Movies first presented the 2011 documentary Baby Peggy: The Elephant in the Room, and has since reaired on various occasions, such as alongside the first broadcast of the Library of Congress-restored version of The Family Secret on October 25, 2015, to mark Cary’s 97th birthday.

In 2016, it was announced that her lost film Our Pet had been re-discovered in Japan.