Alfie isn't the easiest movie to watch these days; the behavior of Michael Caine's title character towards his many women was surely obnoxious even in 1966, and it's nearly unbearable today. Caine's performance is a small miracle in that it makes Alfie, if not exactly likable, at least not quite hateful.
None of the women in the movie makes as much of an impact as Caine, but it's not really their fault. The women in the movie are seen through Alfie's eyes. Since he doesn't see them as full-fledged people -- they're just opportunities for sex -- we don't see them that way, either.
Vivien Merchant as Lily isn't the movie's best-developed female character, but she does get the most dramatic storyline, which is probably why the Oscars singled her out for attention. Alfie meets Lily during the months he spends at a sanitarium; she is the wife of a fellow patient. After Alfie's return to London, he and Lily have a single sexual encounter; she gets pregnant and has an illegal abortion.
Lily is a very quiet and timid woman, highly concerned with propriety (her first words: "Are you sure I should?" when she's invited to take a shortcut to her husband's bedside). Because Lily is so timid, Merchant's performance is largely about body language and facial expression, and she does have a few lovely moments.
Look, for instance, at her face after she has sex with Alfie, when you can read every emotion she's feeling -- pleasure, confusion, and above all guilt -- or when Alfie returns to the apartment after the abortion, when her face is hollow and frozen.
Merchant's finest moment, though, is her very last one, a lovely masterpiece of expressing character through body language. Alfie is about to drive her home after the abortion, and he tosses her a teddy bear as a gift for her youngest child. She catches it and instinctively grips it as if it were the child she's just lost, caressing it and patting its back as if burping it. It's the closest we ever see Lily come to expressing deep emotion. It's a chilling, heartbreaking moment, and it's the only moment in the movie when any of Alfie's women comes close to feeling like a full-fledged person.
Did Merchant deserve to win the Oscar? No, surely not. But the problems with her performance are not entirely her fault, and she manages, if only for an instant, to give Lily a depth that the script has no interest in providing, which surely makes her a deserving nominee.