Born in Berlin, Stein grew up in an era defined by the Nazis. His father Herbert Stein was factory director of Alfred Teves, a motorcycle manufacturing firm that the Nazi regime employed to make automotive parts. Herbert was in charge of 250,000 forced laborers. He was also involved in the Confessing Church, a resistance group.
Stein has said that these events had a profound effect on his life. After the war, his father was sentenced to two years of forced labor for collaborating with the Nazis. Peter's academic performance nose-dived and he barely made it into Frankfurt University. He then moved to Munich and enrolled at university there, pursuing a PhD thesis on the works of E. T. A. Hoffmann.
Having been curious about the theatre since his time at Frankfurt, he became a stagehand in Munich and eventually earned other parts. Proving himself, he was hired as director for Saved by Edward Bond. This piece threw him into the limelight and was critically acclaimed. Politically driven, Stein went on to direct many politically charged pieces, including Vietnam-Discourse by Peter Weiss, Bond's Early Morning, Seán O'Casey's Cock-a-Doodle Dandy, The Changeling by Thomas Middleton and William Rowley and Goethe's Torquato Tasso.
The theatre where Stein originally worked in West Berlin was the Schaubühne am Halleschen Ufer.
After the end of his relationship with his partner Jutta Lampe in 1985, Stein left the Schaubühne.
Stein has also directed operas, such as Rheingold in Paris 1976 (conducted by Georg Solti), Otello for the Welsh National Opera in 1987, or Moses und Aron for the Salzburg Festival 1996 (conducted by Pierre Boulez). In 2011, Stein directed a new production of Verdi's Macbeth for the Salzburg Festival, with Riccardo Muti conducting, and in 2013 he directed Verdi's Don Carlos in Salzburg. He was awarded the Europe Theatre Prize in 2008. He is married to Italian actress Maddalena Crippa.
Productions without a specified location were at the Schaubühne Berlin.