Liedholm joined his first club, Valdemarsviks IF, in 1938. In 1942 he joined IK Sleipner and in 1946 moved to IFK Norrköping, a bigger Swedish club with whom he won two Swedish league titles. During his time with Norrköping, he also earned 18 caps for the Swedish national team, winning the gold medal at the 1948 Summer Olympics. This eventually gave him the chance to join Milan in 1949. He made his Serie A debut on 11 September 1949 in a 3–1 win against Sampdoria. In his first season with Milan, the midfielder played 37 games and scored 18 goals. In 1951, Liedholm won the first of his four scudetto titles. Another three titles followed in 1955, 1957 and 1959. A player with a club that was having the best spell of its life up to that point, Liedholm also won the Latin Cup in 1951 and 1956 and was Captain of Milan in the 1958 European Cup Final against Real Madrid, losing 2–3 (after extra time). It is said that Real Madrid great Alfredo Di Stefano who, felt despite victory knew it was a match Milan could have won. Asking Liedholm to exchange shirts, Liedholm said to him "Keep it. That won't matter. The only thing that will be remembered from this match down the years is that Real Madrid won".
Famous for his passing abilities and tactical awareness, Liedholm was the creator of many of Gunnar Nordahl's goals. Nordahl is the third best scorer in the Serie A with 225 goals in 257 games, behind leading scorer Silvio Piola who has scored 274 goals and Francesco Totti. According to legend, it took two years playing for Milan until Liedholm misplaced his first pass at the San Siro, the rarity prompting a five-minute ovation from the home crowd.
Liedholm was also one of the first players to realise the importance of fitness to a good performance. Consequently, he put in many more hours of training than other players, saying himself that he did the 100 metres, 3000 metres, javelin, shot put and high jump twice a week. His club career would continue until he was almost 40.
Having helped Sweden win the gold medal in the 1948 Olympic tournament, Liedholm was the captain of the national squad at the 1958 World Cup, celebrated in his home country. Aged almost 36, he helped Sweden to reach the World Cup final, where the team lost out to a Brazil side that included Didi and 17-year old Pelé. Liedholm scored the opening goal of the final, which makes him the oldest player to score in a World Cup Final; however, Brazil came back and won the match 5–2.
After he retired from playing, Liedholm enjoyed some time in the backrooms at Milan, before getting promotion for both Verona and then Varese. This brought him to the attention of Fiorentina and then Milan, where he finally took control of the first team. He guided them to their tenth league title in 1979 before moving on to become the manager of Roma. Leading talents such as Paulo Roberto Falcão and Bruno Conti, he took them to their second league title ever in 1983 using the zonal marking system, which was unusual in Italy at the time. A year later, his Roma side lost on penalties to Liverpool in the European Cup Final. He also won the Coppa Italia three times with Roma, in 1980, 1981 and 1984.
As well as saying that the modern game is much more frantic and fast-paced than when he was involved, Liedholm, always a professional, also observed that "they [players] do not do much to avoid fouling players... It is too easy to stop a player by fouling him. Proper training teaches you how to win the ball without committing a foul, which is much more difficult.