Matthew Raymond Dillon was born in New Rochelle, New York, the son of Mary Ellen, a homemaker, and Paul Dillon, a portrait painter and sales manager for Union Camp, a packing material manufacturer. His paternal grandmother was the sister of comic strip artist Alex Raymond, the creator of Flash Gordon. Dillon is the second of six children; he has one sister and four brothers, one of whom, Kevin Dillon, is also an actor and appeared on the hit TV series Entourage, which earned him several Emmy nominations in the supporting actor comedy category. He has Irish, and some Scottish and German, ancestry. Dillon was raised in a close-knit Roman Catholic family. He grew up in Mamaroneck, New York.
In 1978, Jane Bernstein and a friend were helping director Jonathan Kaplan cast the violent teen drama Over the Edge when they found Dillon cutting class at Hommocks Middle School in Larchmont. Dillon auditioned for a role and made his debut in the film. The film received a regional, limited theatrical release in May 1979, and grossed only slightly over $200,000. Dillon's performance was well-received, which led to his casting in two films released the following year; the teenage sex comedy Little Darlings, in which Kristy McNichol's character loses her virginity to a boy from the camp across the lake, played by Dillon, and the more serious teen dramedyMy Bodyguard, where he played a high-school bully opposite Chris Makepeace. The films, released in March and July 1980, respectively, were box office successes and raised Dillon's profile among teenage audiences.
Another of Dillon's early roles was in the Jean ShepherdPBS special The Great American Fourth of July and Other Disasters. The only available copies of this film are stored at UCLA, where a legal dispute makes it unavailable to the public.
Dillon did voiceover work in the 1987 documentary film Dear America: Letters Home from Vietnam. In 1989, Dillon won critical acclaim for his performance as a drug addict in Gus Van Sant's Drugstore Cowboy.
Dillon had a three-year relationship with actress Cameron Diaz in the late 1990s.
On December 30, 2008, he was arrested by the Vermont State Police after he was clocked traveling at 106 miles per hour northbound on Interstate 91 near Newbury, Vermont. He was charged with negligent operation of a vehicle. His attorney, Mark Kaplan, entered a plea of not guilty on Dillon's behalf in a January appearance in Orange County Court in Chelsea, and also appeared in court on February 25, 2009. He faced a maximum of one year in jail, and a fine of $1,000. He pled guilty to speeding and paid a $828 fine on March 30, 2009; in return, the negligence charge was dismissed by prosecutors.