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Gwen Kelly began writing as a Sydney primary school student, and as a teenager she regularly published poems in her school journal and in the children's pages of magazines and newspapers. In the 1940s some of her early verse was published, under the pen name Nita Heath, in an anthology entitled Green Valleys. This early verse was especially concerned with the themes of natural beauty and religious faith.
Kelly studied English and Philosophy at the University of Sydney, graduating with First Class Honours and a University Medal. At the university she moved away from her evangelical Baptist upbringing, eventually becoming an atheist. Her experience at university offered the basis for her first novel, There Is No Refuge (1961), which portrays a young evangelical university student's passionate discovery of free thought and free love.
In 1944 and 1945 Kelly worked in the Universities Commission, part of the War Organisation of Industry. She married in 1945 and in 1947 became a Fellow in Philosophy at the University of Sydney. She also briefly taught philosophy at the University of New England, before moving to Armidale in the 1950s. During this period she began to publish short stories in Australian literary journals.
In 1960 and 1961 Kelly and her family lived in Quebec, Canada. Canada provides the landscape for Kelly's second novel, The Red Boat (1968), a book which explores the destructive effects of a breakdown in childhood filial relationships. For the rest of the 1960s Kelly lived in Armidale, where she taught in local secondary schools before becoming Lecturer in English and Philosophy at the Armidale Teachers' College in 1964. She continued to publish short stories in literary journals, and in 1968 she won the first Henry Lawson Prose Award.
In 1974 she received a three-year Senior Fellowship from the Australian Council Literature Board. During this time she published her third novel, The Middle-Aged Maidens (1976). In 1981 a selection of her poetry was published, as well as her fourth novel, Always Afternoon, which portrayed the treatment of German people in New South Wales during the First World War. Kelly's fifth novel and a selection of her short stories were published in 1988, and her autobiography, Lifted from Life, appeared in 2001. Her work has been published in more than a dozen anthologies of Australian writing, and has been translated in Switzerland, Germany and Indonesia.