Previous theoretical and computational studies on hypervelocity impact have mainly focused on the dynamic response of the solid materials that constitute the projectile and the target, while the surrounding environment is often assumed to be a vacuum. In this paper, we consider impact events that occur in a fluid (e.g., gas) medium, and present a computational model that includes the dynamics, thermodynamics, and ionization of the surrounding fluid material. The model couples the compressible Navier–Stokes equations with the Saha equations to predict the onset and extent of ionization in the surrounding fluid. An extended level set method with two signed distance functions is employed to track the three material interfaces between the projectile, the target, and the ambient fluid. This method accommodates the large deformation, contact, and separation of the interfaces, while avoiding spurious overlapping of different material subdomains. The advective fluxes across material interfaces are computed by constructing and solving bimaterial Riemann problems, thereby taking into account the discontinuities in both state variables (e.g., density) and thermodynamic relations. The computational model is first verified for an infinite ideal plasma and a one-dimensional three-material impact problem. Next, the model is employed to analyze the impact of a tantalum rod projectile onto a soda lime glass (SLG) target in an argon gas environment. In different analyses, the impact velocity is varied between 3 and 6km/s, and the radius of the projectile is varied between 2.5 and 10mm. Each analysis starts with a steady-state fluid dynamics simulation that generates the shock-dominated hypersonic flow around the projectile. This flow field is then used as an initial condition to start the fluid–solid coupled impact simulation. The predicted maximum temperature and pressure within the SLG target agree reasonably well with published experimental data for a similar material (fused quartz). Within the ambient gas, the impact-generated shock wave is found to be stronger than the initial bow shock in front of the projectile. Behind this shock wave, a region of high pressure and temperature forms in the early stage of the impact, mainly due to the hypersonic compression of the fluid between the projectile and the target. The temperature within this region is significantly higher than the peak temperature in the solid materials. For impact velocities higher than 4km/s, ionization is predicted. This finding indicates that the ambient gas may be a nontrivial contributor to the plasma formed in terrestrial and atmospheric hypervelocity impact events.