Dutta was born to a Punjabi father and an Anglo-Indian mother in Ghaziabad, Uttar Pradesh. Her father is Wing Commander L.K. Dutta (retired) and her mother is Jennifer Dutta. She has an elder sister, Sabrina, who serves in the Indian Air Force and younger sister Cheryl. Composer/DJ Nitin Sawhney is a cousin of Lara Dutta.

Dutta won the annual Gladrags Megamodel India competition in her native India in 1995, thus winning the right to enter the 1997 Miss Intercontinental Pageant, in which she took first place. Later, she was crowned Femina Miss India Universe in 2000.  At Miss Universe 2000 in Cyprus, she achieved the highest score in the swimsuit competition and her finalist interview score was the highest individual score in any category in the history of the Miss Universe contest, as her interview saw a majority of the judges giving her the maximum 9.99 mark.  After her final question, in which she delivered a defense of the Miss Universe contest (and other beauty pageants), she became the second Indian Miss Universe. Dutta's win led to her appointment as a UNFPA Goodwill Ambassador in 2001. In the same year, Priyanka Chopra and Dia Mirza won their respective Miss World and Miss Asia Pacific titles which gave India a rare triple victory in the world of beauty pageants. She signed up for the Tamil film, Arasatchi in 2002, but due to financial problems, it was only released in mid-2004. She made her Hindi debut in 2003 with the film Andaaz which was a box office success and won her a Filmfare Best Female Debut Award. She then went on to appearing in Bardaasht, which failed to do well at the box office. Her next release Aan: Men at Work was also a flop in India. Insan, Elaan and Jurm also ended up failing to do well at the box office. She later appeared in Masti.

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After her final question, in which she delivered a defense of the Miss Universe contest (and other beauty pageants), she became the second Indian Miss Universe.