Alvarez, the son of a research physiologist, was born in San Francisco and educated at the University of Chicago where he gained his PhD in 1936. He moved soon after to the University of California, Berkeley. Apart from wartime work on radar at the Massachusetts Institute of Technology Radiation Laboratory (1940–43) and on the Manhattan Project at Los Alamos (1943–45), Alvarez spent his entire career at Berkeley, serving as professor of physics from 1945 until his retirement in 1978.

In 1938 Alvarez reported his first major discovery, namely, the phenomenon of orbital electron capture. In 1936 Hans Bethe had argued that an excited nucleus could decay by capturing one of its own orbiting electrons, a process known as K-capture as the electron is taken from the innermost (K) electron shell. Alvarez succeeded in detecting the process experimentally by identifying the characteristic x-rays emitted during K capture as a result of electrons moving from outer orbits into the vacant K orbit.

Alvarez followed this by making (1939) the first measurement, with Felix Bloch, of the neutron's magnetic moment. He also demonstrated that hydrogen-3 (tritium) was radioactive, work which proved to be of significance in the later development of the hydrogen bomb.

While working on radar during the war Alvarez had what he later described as one of his most valuable ideas. If radar could be used to track approaching aircraft then, he argued, the same information should be adequate to guide a pilot to a safe landing in bad weather. There were many obstacles to be overcome before GCA (Ground Controlled Approach) could be adopted. By early 1943, however, Alvarez was able to talk down a distant plane he could follow only on radar.

Soon after he moved to Los Alamos where he worked on the problem of detonating the bomb. It was necessary for 32 detonators to fire simultaneously. Alvarez was an observer in a follow-up plane of the Hiroshima bomb.

After the war Alvarez remained as creative as ever. His most important work was in the field of particle physics. By the early 1950s experimentalists had begun to find it difficult to track particles. Cloud chambers took too long to operate, emulsions could only pick up charged particles and consequently much was being missed. In April 1953 Alvarez was introduced by Donal Glaser to the idea that particles passing through a small glass bulb containing diethyl ether would produce bubble tracks. The chamber operated by suddenly reducing the pressure causing the liquid to ‘boil’ and leave a bubble track where a particle had passed.

Alvarez immediately began to design a much larger bubble chamber using liquid hydrogen as a fluid. After a few test runs with some small chambers Alvarez proposed to build a 72-inch model at a cost of 2.5 million dollars. It first came into operation in March, 1959, and was used to discover a large number of elementary particles. For his work in this field Alvarez was awarded the 1968 Nobel Prize for physics.

Alvarez also investigated other phenomena. In 1977 his son Walt, a geologist, showed him a rock from Gubbio in the Italian Apennines. It was aged 65 million years and consisted of two layers of limestone, one from the Cretaceous, the other from the Tertiary, separated by a thin clay strip. During the rock's formation the dinosaurs had flourished and passed into extinction.

Alvarez was intrigued by the presence in the clay of unusually high concentrations of iridium. No more than about 0.03 parts per billion are normally to be found in the Earth's crust. The geologists, however, reported that there was 300 times as much iridium in the clay layer than in the surrounding limestone samples (an example of what is now known as the ‘iridium anomaly’). The clay, it was calculated, had formed over a mere 1000 years, and was located in time at the KT boundary (K = Kreide, German for Cretaceous, T = Tertiary). Could the thin strip of clay and its iridium content throw any light on the mass extinctions that were taking place during its formation?

He first suggested that the iridium could have come from a nearby supernova explosion. This was soon rejected after a fruitless search in the clay for traces of plutonium–244, another supernova byproduct. Alvarez began to consider another possibility, namely, a collision with a large asteroid. It would certainly bring along with it the observed iridium, but it was not immediately apparent how the asteroid could produce a global extinction. Further reflection suggested that an asteroid 10 kilometers in diameter would throw sufficient dust into the atmosphere to darken the sky for several years. This in turn would prevent photosynthesis, destroy plant life and, along the way, all other dependent creatures.

Alvarez published his theory in 1980 and spent much of the remaining decade of his life explaining and defending his views. Some geologists objected that dinosaurs had become extinct some 20,000 years before the iridium layer was deposited. Others claimed that prolonged darkness would have been as damaging to marine as to terrestrial life, whereas marine life suffered no comparable mass extinction. Despite these and other objections Alvarez's impact theory survived the 1980s as the most favored account of the death of the dinosaurs.

Alvarez left a vivid account of his life in his Alvarez, Adventures of a Physicist (1987).