The present paper addresses the issue of direct simulation of complex local failure patterns in laminated composites. A model capable of the discrete modeling of matrix cracking, delamination, and the interaction of these two damage modes is proposed. The analytical technique develops the regularized extended finite element method for the simulation of matrix crack initiation and propagation at initially unknown locations, as well as a cohesive interface model for delamination. The regularized extended finite element method preserves the Gaussian integration schema in each element regardless of the enrichment required to model cracking and is capable of representing the complex kinematics of crack networks in composite laminates. The technique uses independently measured standard ply-level mechanical properties of the unidirectional composite (stiffness, strength, fracture toughness). Failure simulations of composites containing open holes are presented. Although the process of crack initiation is impossible to capture precisely due to local material variations the proposed method exhibits excellent agreement with experimental data for matrix and delamination crack growth in quasi-isotropic open hole graphite-epoxy composites with thick plies, where the composite fails in the delamination failure mode.