Gusmão was born in Manatuto, in what was then Portuguese Timor, to parents of mixed Portuguese-Timorese ancestry, both of whom were school teachers.
During this time, he married Emilia Batista, with whom he had a son Eugenio, and a daughter Zenilda.
He attended a Jesuit high school just outside Dili. After leaving high-school for financial reasons at the age of fifteen, he held a variety of unskilled jobs, while continuing his education at night school.In 1966, Gusmão obtained a position with the public service, which allowed him to continue his education.
In 1968 Gusmão was recruited by the Portuguese Army for national service.He served for three years, rising to the rank of corporal.
In 1971, Gusmão completed his national service, his son was born, and he became involved with a nationalist organisation headed by José Ramos-Horta. For the next three years he was actively involved in peaceful protests directed at the colonial system.
It was in 1974 that a coup in Portugal resulted in the beginning of decolonisation for Portuguese Timor, and shortly afterwards the Governor Mário Lemos Pires announced plans to grant the colony independence.
Taking advantage of the internal disorder, and with an eye to absorbing the colony, Indonesia immediately began a campaign of destabilisation, and frequent raids into Portuguese Timor were staged from Indonesian West Timor. By late 1975 the Fretilin faction had gained control of Portuguese Timor and Gusmão was released from prison. He was given the position of Press Secretary within the Fretilin organisation.
During most of 1975 a bitter internal struggle occurred between two rival factions in Portuguese Timor. Gusmão became deeply involved with the Fretilin faction, and as a result he was arrested and imprisoned by the rival faction the Timorese Democratic Union (UDT) in mid-1975.
On 28 November 1975, Fretilin declared the independence of Portuguese Timor as "The Democratic Republic of East Timor", and Gusmão was responsible for filming the ceremony.
Nine days later, Indonesia invaded East Timor. At the time Gusmão was visiting friends outside of Dili and he witnessed the invasion from the hills. For the next few days he searched for his family.
After Fretilin suffered some major setbacks in the early 1980s, including a failed 1984 coup attempt against Gusmão led by four senior Falintil officers, including Mauk Moruk. Gusmão left Fretilin and supported various centrist coalitions, eventually becoming a leading opponent of Fretilin.
By the mid-1980s, he was a major leader. During the early 1990s, Gusmão became deeply involved in diplomacy and media management, and was instrumental in alerting the world to the massacre in Dili that occurred in Santa Cruz on 12 November 1991.
As a result of his high profile, Gusmão became a prime target of the Indonesian government. A campaign for his capture was finally successful in November 1992.
In May 1993, Gusmão was tried, convicted and sentenced to life imprisonment by the Indonesian government. He was found guilty under Article 108 of the Indonesian Penal Code (rebellion), Law no. 12 of 1951 (illegal possession of firearms) and Article 106 (attempting to separate part of the territory of Indonesia).
Gusmão spoke in his own defence and he was appointed with defence lawyers before the commencement of his trial. The sentence was commuted to 20 years by Indonesian President Suharto in August 1993.
In 1999, Gusmão divorced Emilia Batista.
On 30 August 1999, a referendum was held in East Timor and an overwhelming majority voted for independence. The Indonesian military commenced a campaign of terror as a result, with terrible consequences. Although the Indonesian government denied ordering this offensive, they were widely condemned for failing to prevent it.
As a result of overwhelming diplomatic pressure from the United Nations, promoted by Portugal since the late 1970s and also by the United States and Australia in the 1990s, a UN-sanctioned, Australian-led international peace-keeping force (INTERFET) entered East Timor, and Gusmão was finally released. Upon his return to his native East Timor, he began a campaign of reconciliation and rebuilding.
In 2000, he married Australian Kirsty Sword, with whom he had three sons: Alexandre, Kay Olok and Daniel.
During this time he continually campaigned for unity and peace within East Timor, and was generally regarded as the de facto leader of the emerging nation. Elections were held in late 2001 and Gusmão, endorsed by nine parties but not by Fretilin.
In the 2002 presidential election, Gusmão ran as an independent and he was comfortably elected as leader .
Gusmão became the first President of East Timor when it became formally independent on 20 May 2002.
In March 2007 he said that he would lead the new National Congress for Timorese Reconstruction (CNRT) into the parliamentary election planned to be held later in the year, and said that he would be willing to become prime minister if his party won the election.
Gusmão declined to run for another term in the April 2007 presidential election.
The CNRT placed second in the June 2007 parliamentary election, behind Fretilin, taking 24.10% of the vote and 18 seats. He won a seat in parliament as the first name on the CNRT's candidate list.
The CNRT allied with other parties to form a coalition that would hold a majority of seats in parliament. After weeks of dispute between this coalition and Fretilin over who should form the government, Ramos-Horta announced on 6 August that the CNRT-led coalition would form the government and that Gusmão would become Prime Minister on 8 August.
Gusmão was sworn in at the presidential palace in Dili on 8 August.
On 11 February 2008, a motorcade containing Gusmão came under gunfire one hour after President José Ramos-Horta was shot in the stomach. Gusmão's residence was also occupied by rebels. According to the Associated Press, the incidents raised the possibility of a coup attempt; they have also described as possible assassination attempts and kidnap attempts.