Efficient, precise dynamic modeling and control of complex underwater towed systems has become a research focus in the field of multibody dynamics. In this paper, based on finite segment model of cable, by defining the new state vectors and deducing the new transfer equations of underwater towed systems, a new highly efficient method for dynamic modeling and simulation of underwater towed systems is presented and the pay-out/reel-in process of towed cable is studied. The computational efficiency and numerical stability of the proposed method are discussed. When using the method to study the dynamics of underwater towed systems, it avoids the global dynamic equations of system, and simplifies solving procedure. Irrespective of the degree of freedom of underwater towed system, the matrices involved in the proposed method are always very small, which greatly improve the computational efficiency and avoids the computing difficulties caused by too high matrix orders for complex underwater towed systems. Formulations of the method as well as numerical simulations are given to validate the proposed method.