Damage monitoring during the service life of Type III composite overwrapped pressure vessels (COPVs) is crucial for ensuring their safe operation. This paper focuses on the damage localization in COPVs using ultrasonic guided waves structural health monitoring (SHM) techniques. Firstly, dispersion curves were plotted to establish a foundation for experiments and simulations based on the propagation theory of guided waves in multilayered anisotropic structures. Subsequently, a 3D finite element model of COPV was constructed to capture the propagation characteristics of guided waves within the COPV and their interaction with damage. The effects of different fiber angles and fiber layer numbers on guided waves propagation were analyzed, and their interrelationships were established. Furthermore, the “Wave Velocity Directionality” effect of the A0 mode was identified during its propagation in COPV. The monitoring signals obtained from experiments were analyzed to assess the impact of damage on the time-domain and frequency-domain signals of guided waves. Finally, a damage localization algorithm based on mode-matching was proposed, and its localization accuracy was verified in COPVs with different damage locations and fiber layer numbers. The results demonstrate the significant potential of the proposed damage localization algorithm in the damage monitoring of COPV structures.