Billions of people must have pushed the Dolby buttons on their cassette recorders, or seen movies such as Star Wars in Dolby Stereo, without thinking of the eponymous inventor of the world's most popular noise-reduction system. Nonetheless, the name and the company's "mirrored D" Dolby Digital logo will live on for decades following the death of the inveterate inventor Ray Dolby from leukaemia at the age of 80.

Dolby transformed the film industry by improving sound quality with his Dolby A noise-reduction system, widely installed following the popularity of Star Wars and other films by George Lucas. He also had a huge impact on the tape-cassette business thanks to the almost universal adoption of the consumer version, Dolby B.

His noise-reduction system worked by applying a pre-emphasis to the audio recording, usually boosting the quieter passages. The reverse process was used on playback. Removing the boost – lowering the level – also removed most of the tape hiss that accompanied all analogue recordings. Of course, people did not care how it worked: they could hear the difference.

Dolby grew up tinkering with mechanical things, and developed an interest in film-making that changed his life. Alex Poniatoff, founder of the video and audio-recording firm Ampex, asked Dolby's high school for a projectionist for a talk he was giving, and Dolby volunteered. The 16-year-old wanted to be a cameraman and had put together his own rig. Poniatoff recognised his talent and invited him to work for Ampex, which had developed the first commercial audio tape recorder and was now working on a video version.

"I was so far ahead in my credits that I didn't have to worry about getting into college, so I went to school three hours a day and worked five at Ampex," Dolby told the Los Angeles Times in 1988. He made major contributions, and filed his first patent at the age of 19. Eventually he held more than 50. Dolby left Ampex when he graduated from Stanford University in 1957. He took a Marshall scholarship to study for his PhD at Cambridge, sailing for Britain on the Queen Elizabeth.

It was in Cambridge that he met his future wife, Dagmar Bäumert, a summer student from Germany. Later, she joined him in India, where he spent two years working for Unesco as a science adviser.

One of Dolby's personal projects was to record Indian musicians, and he set up a home studio. While the young couple were driving back to Britain, he filed another patent from Afghanistan.The next step, in 1965, was to set up a firm in London to sell Dolby equipment to recording studios. Success came with Decca Records, which ordered the first nine Dolby A-301 professional noise-reduction units at £700 each.

However, he moved the company from the Clapham Road, south-west London, to California after the birth of his first child. This turned out to be a smart move because it put him next door to the Hollywood film industry – though that was not why he did it. He had looked at British boarding schools and, he said later, "Frankly, I never did like that idea very much. I grew up as a happy California kid, and I wanted my children to have that same opportunity."

Ray was born in Portland, Oregon, to Esther and Earl Dolby, a real estate salesman. The family moved to Palo Alto when Ray was young. He played the piano and clarinet, but said later: "Mainly, though, I was fascinated by the technology of music: how organs worked, how reeds vibrated, why things sounded the way they did."

He said: "I've often thought that I would have made a great 19th-century engineer, because I love machinery. I would have liked to have been in a position to make a better steam engine, or to invent the first internal combustion engine; to work on the first car. All my life, I've loved everything that goes; I mean bicycles, motorcycles, cars, jeeps, boats, sail or power, airplanes, helicopters. I love all of these things and I just regret that I was born in a time when most of those mechanical problems had already been solved and what remained were electronic problems."

The success of Dolby Laboratories, which he kept as a private company, made Dolby a billionaire. He was able to enjoy life in a house overlooking the Golden Gate bridge, go sailing, and keep developing new sound technologies to enhance people's enjoyment of movies and music. These included Dolby HX/HX-Pro (Headroom eXtension), the Dolby SR (Spectral Recording) system, Dolby Digital Surround EX, and the Dolby AC-3 and TrueHD audio codecs, converting analogue signals to digital and back again.

Public recognition for Dolby's work included a US National Medal of Technology, two Oscars for scientific and technical achievement, several Emmys, a Grammy, an honorary OBE and a star on Hollywood's Walk of Fame.

He is survived by Dagmar, their sons, Tom and David, and four grandchildren.

• Ray Milton Dolby, audio engineer, born 18 January 1933; died 12 September 2013

• Ray Dolby on the Dolby website