Lally was born in Ireland. He was educated, as a boarder, at St. Mary's College, Galway. He began a career as a teacher, but gave it up for the stage. He starred in the premiere of Brian Friel's play Translations in 1980 in County Londonderry whilst he was a member of the Field Day Theatre Company, founded by Brian Friel and Stephen Rea. Lally was also one of the founding members of the Druid Theatre Company. He played the role of Miley Byrne in the RTÉ soap Glenroe, reprising the character that he played earlier in the Bracken T.V. series in 1978. Lally also enjoyed some musical success when The By-road to Glenroe went to the top of the Irish charts in 1990. He has also done voice-over work on Irish television.
In 1979, Lally won a Jacob's Award for his performance as Miley in Bracken.
Mick Lally is a fluent speaker of the Irish language, and his children study in Irish-speaking schools (gaelscoileanna).