Kelly immediately established himself as his peers' favorite songwriter. On nights off, Melbourne's musicians went to see him. He also had a big fan at Mushroom Records. One of the company's PR people locked herself in a room, refusing to come out until Mushroom signed Paul Kelly & the Dots. The result was two roots rock albums, Talk and Manila, that Kelly himself was never completely happy with, for he was a perfectionist. By late 1984, Kelly had broken up the Dots and moved to Sydney, where he recorded a defining solo album called Post. Without a record contract and no real idea how the album was going to be released, Post was recorded over two weeks on a shoestring budget, delivering the essence of Paul Kelly in a loosely structured song cycle signposting Adelaide, Melbourne, and Sydney place names the way Springsteen speaks of New Jersey. On the strength of that album, Mushroom picked up Kelly's contract again, and the singer formed a new group, Paul Kelly & the Coloured Girls (a reference to Lou Reed's "Walk on the Wild Side").

In September 1986, Kelly's songwriting skills spilled over four sides of the 14-song double album Gossip. Recorded in just a month, the classic Australian rock album attained gold sales and produced the hit singles "Darling It Hurts" and "Before Too Long." The album included three re-recorded songs from Post. Gossip was also the record that introduced Kelly to American audiences when it was released by A&M Records in July 1987, edited down to a 15-song single album. In the meantime, the group returned to the studio to record a collection of 14 new Kelly originals for its second Australian album, Under the Sun. To avoid misunderstandings, the group changed its name to Paul Kelly & the Messengers with the release of July 1989's So Much Water, So Close to Home album. The new album was produced by Scott Litt of R.E.M. notoriety and its songs were colored by American influences and experiences. After one more album, Comedy, Kelly decided the group had gone as far as it could, and to avoid the risk of repeating themselves, he dissolved the Messengers with a farewell tour.

For the next two years, Kelly recharged his batteries with a set of diverse activities, like performing in Australia and America, producing the groundbreaking Charcoal Lane album by aboriginal songwriter Archie Roach, collaborating on Yothu Yindi's "Treaty," writing songs for his acting role in the stage play Funerals and Circuses about racial tensions in small-town Australia, and releasing his first book of poetry, Lyrics. His second studio solo album, 1994's Wanted Man, spread his musical influences as wide as his activities. His 1997 greatest-hits album Songs from the South sold double platinum. In 1999, he delivered two very different albums at the same time, a bluegrass album with Uncle Bill called Smoke and a technology-influenced album as part of a new group, Professor Ratbaggy. Kelly stayed prolific in the 21st century, releasing Nothing But a Dream in 2001, the double-disc Ways & Means in 2004, the bluegrass-inflected Foggy Highway in 2005, and Dirt in 2006.