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After three terms on the Anchorage Assembly, he served two terms as mayor of Anchorage from 1981 to 1987. Knowles first ran for governor in 1990, but was defeated by Walter Hickel. In 1994, he defeated former lieutenant governor Steve McAlpine in the Democratic primary and was elected governor in the general election. In the generally Republican state of Alaska, Knowles's victory was largely brought about by the extremely negative campaign strategy used by the Republican candidate Jim Campbell. In the election, Knowles received 41.1%, Campbell 40.8% and lieutenant governor Jack Coghill of the Alaskan Independence Party 13%. Knowles won the 1998 election in a landslide, defeating Republican John Lindauer 51%-18%. He did not run for reelection in 2002 due to a consecutive two-term limit.
Knowles was chair of the Western Governors' Association in 1997, two-term chair of the Interstate Oil & Gas Compact Commission, and a member of the Pew Oceans Commission (POC). His membership in the POC caused him later problems due to the anti-fishing industry stance taken by that organization.
During his term, Knowles established Denali Kid Care, which provided basic health care for 25,000 children and 5,000 pregnant women. The National Child Welfare League named Knowles as their Child Advocate of the Year in 1998.
Governor Knowles forged the "Millennium Agreement", a government-to-government agreement with tribes to foster rural delivery of services and economic development. He earned special recognition by the National Congress of American Indians in 2001 and the Alaska Federation of Natives Denali Award, the highest award given to a non-native.
Knowles pushed Canadian officials to adopt his "safe passage" principle to protect Pacific salmon and their freshwater habitat, leading to the successful negotiation of the first coast wide salmon treaty in decades.
During his final term as governor, opponents attacked him as a weak leader who avoided taking a position on several key issues, as exemplified by the "Where's Tony?" campaign.
In 2004 he ran for the United States Senate, as the Democratic challenger to Republican incumbent Lisa Murkowski. Knowles was at first thought likely to win by many, but he was narrowly defeated in the election.