In 1978, Allen made her major film debut in National Lampoon's Animal House. Her next two film appearances were in The Wanderers in 1979 and A Small Circle of Friends in 1980, where she played one of three radical college students during the 1960s. She also appeared (as a guest star) in the 1979 pilot episode of the long-running CBS series Knots Landing.

Her career-changing role came with the blockbuster hit Raiders of the Lost Ark (1981), directed by Steven Spielberg, in which she played the feisty heroine Marion Ravenwood, love interest of Indiana Jones (Harrison Ford). Allen won a Saturn Award for Best Actress for her performance.

Allen debuted on Broadway in the 1982 production The Monday after the Miracle. After a few small films, including the leading role in the Paris-set romantic drama Until September (1984), directed by Richard Marquand, and other stage appearances, she co-starred with Jeff Bridges in the science fiction film Starman (1984).

She often took breaks from movie roles to concentrate on stage acting, though in 1987, Allen appeared as Laura in the Paul Newman directed film version of the Tennessee Williams play The Glass Menagerie with John Malkovich and Joanne Woodward.

A year later, Allen returned to the big screen as Bill Murray's long-lost love, Claire, in the Christmas comedy Scrooged. In 1990, she portrayed the doomed crew member Christa McAuliffe in the controversial television movie, Challenger, based on the 1986 Space Shuttle Challenger disaster.

Allen subsequently appeared in Spike Lee's Malcolm X (1992), in a small supporting role in The Perfect Storm (2000), and In the Bedroom (2001). She made guest appearances on television's Law & Order (1996) and Law & Order: Special Victims Unit (2001). She has also starred in the short-lived series The Road Home (1994) and portrayed Dr. Clare Burton in the video game Ripper (1996).

Allen reprised her best-known role as Marion Ravenwood for the 2008 sequel Indiana Jones and the Kingdom of the Crystal Skull, in which she renews her relationship with Indiana Jones and reveals to him that they have a son named Mutt Williams, played by Shia LaBeouf.