Born in Munich, Babbel's first professional club was Bayern Munich. He advanced from the youth squad to the first team and was a starting player eight times, and made four appearances as a substitute in league games.
He moved to Hamburger SV in August 1992 and appeared regularly in the first team, scoring his first league goal. Transferring back to Bayern Munich in 1994, he was a starter in 167 games, and attracted the attention of Manchester United following UEFA Euro 1996. A £5 million deal was put in place for the German full back, but it never went through. He was then bought by Liverpool F.C. manager Gérard Houllier in June 2000, forming part of the back four during Liverpool's successful 2000–01 season.
He was an integral member of Liverpool's side and his characteristic raiding runs down the right side led to a number of goals, including one in the UEFA Cup final itself. His Liverpool career was forced to a sudden halt when he contracted Guillain–Barré syndrome and was unable to play for a year.
He went on loan to Blackburn Rovers in August 2003 after having recovered from Guillain-Barré syndrome, achieving regular first team appearances in the league and scoring three goals in the process. Babbel won the UEFA Cup twice, in 1996 with Bayern and in 2001 with Liverpool.
Following his retirement from football, Babbel stayed on with his last club, VfB Stuttgart, as an assistant manager.
On 23 November 2008, Babbel became head coach of VfB Stuttgart, following Armin Veh. Upon Babbel's arrival, VfB Stuttgart were 11th in the table after 14 games. They finished the season in third place, five points off league winners VfL Wolfsburg and qualifying for the Champions League. On 6 May 2009, Babbel extended his contract with VfB Stuttgart until the summer of 2011, however, on 6 December 2009 VfB Stuttgart and Babbel parted ways. At the time of Babbel's sacking, VfB Stuttgart were in 16th place after 15 games played.
Under Babbel, VfB Stuttgart finished second in their Champions League group and qualified for the round of 16.