Powder-Fueled Water Ramjet Engine (PFWRE) is of great attraction for high-speed and long-voyage underwater propulsion, as well as air-water trans-media navigation applications due to its high energy density and thrust adjustability. However, the complex multiphase combustion process in the combustor significantly affects engine performance. In this study, a detailed model for aluminum particle combustion in water vapor is developed and validated via literature data as well as the ground direct-connected test we conducted. Thereafter, the numerical study on the multiphase combustion process inside the aluminum-based PFWRE combustor is carried out within the Euler–Lagrange framework using the developed model. Results show that a reverse rotating vortex pair before the primary water injection causes particles to flow back towards the combustor head and leads to product deposition. Aluminum particles external to the powder jet have shorter preheating time than internal particles and burn out in advance. The analysis of the particle combustion process indicates that the flame structure inside the combustor consists of the particle preheating zone, the surface combustion heat release zone, the gas-phase combustion heat release zone, and the post-flame zone. In the present configuration, as the particle size increases from 10 μm to 20 μm, the preheating zone length increases from 35 mm to 85 mm. Meanwhile, heat release from gas-phase combustion decreases, and the average temperature of the combustor head first increases and then decreases. This study not only provides insight into the multiphase combustion characteristics of the aluminum-based PFWRE combustor but also offers guidance for the design of the combustion organization schemes and engine structure optimization.