In this paper, we propose a phase-based pseudorange estimation and source localization algorithm to improve the localization performances of ultrashort baseline (USBL) systems. The conventional USBL system estimates pseudorange through cross-correlation of received chirps. However, due to the limited sampling rate, precise pseudorange cannot be estimated, resulting in low localization performance. The proposed method calculates the number of wavelengths between the transducer and receiver and detects the initial phase to estimate the pseudorange more accurately than the conventional method. It also improves localization performance by estimating and compensating for phase variations by underwater channels. The source localization performances of the proposed method and the conventional methods were compared and analyzed through computer simulations and ocean experiments, and the proposed method had better localization performances than the conventional methods.