Callaghan was born and raised in Toronto, Ontario. He was educated at Riverdale Collegiate Institute, the University of Toronto and Osgoode Hall Law School. He never practiced law, however. During the 1920s he worked at the Toronto Daily Star where he became friends with fellow reporter, Ernest Hemingway formerly of The Kansas City Star. Callaghan began writing stories that were well received and soon was recognized as one of the best short story writers of the day. He then spent some months in Paris, France, where he was part of the great gathering of writers in Montparnasse such as Ernest Hemingway, F. Scott Fitzgerald, James Joyce and others.
He recalled this time in his 1963 memoir, That Summer in Paris. In this book he discusses the infamous boxing match between him and Hemingway. Callaghan took up Hemingway's challenge to a bout and, being a better boxer, knocked Hemingway to the ground. The blame was centered on Fitzgerald's lack of attention on the stopwatch as he let the boxing round go over time.
Callaghan's novels and short stories are marked by undertones of Roman Catholicism, often focusing on individuals whose essential characteristic is a strong but often weakened sense of self. His first novels were Strange Fugitive (1928), a number of short stories, novellas and novels followed. Callaghan published little between 1937 and 1950 - an artistically dry period. However, during these years, many non-fiction articles were written in various periodicals such as New World (Toronto), and National Home Monthly. Luke Baldwin's Vow, a slim novel about a boy and his dog, was originally published in a 1947 edition of Saturday Evening Post and soon became a juvenile classic read in school rooms around the world. The Loved and the Lost (1951) won the Governor General's Award. Callaghan's later works include, among others, The Many Colored Coat (1960), A Passion in Rome (1961), A Fine and Private Place (1975), A Time for Judas (1983), Our Lady of the Snows (1985). His last novel was A Wild Old Man Down the Road (1988). Publications of short stories have appeared in The Lost and Found Stories of Morley Callaghan (1985), and in The New Yorker Stories (2001). The four volume The Complete Stories (2003) collects for the first time 90 of his stories.
Callaghan married Loretto Dee, with whom he had two sons: Michael (born November 1931) and Barry (born 1937), poet and author. Barry Callaghan's memoir Barrelhouse Kings (1998), examines his career and that of his father. After outliving most of his contemporaries Callaghan died after a brief illness in Toronto. He was 87 and is interred in Mount Hope Catholic Cemetery in Ontario.
Callaghan was also a contributor to The New Yorker, Harper's Bazaar, Maclean's, Esquire, Cosmopolitan, Saturday Evening Post, Yale Review, New World, Performing Arts in Canada, and Twentieth Century Literature.