Existing underwater ultrasonic water-level measurement methods have low accuracy and cannot meet the needs of hydraulic physical model experimental measurements. To solve this problem, herein, the source and magnitude of the error are analyzed. By considering the effect of water sound velocity and transit time on measurement accuracy, an underwater high-precision ultrasonic water-level measurement method is proposed. First, by considering the effect of the gap error of the ultrasonic transducer on the accuracy of sound speed measurement, a gap error calculation method is proposed, and the effect of changes in the water environment on the accuracy of water-level measurement is eliminated in principle. Second, according to the principle of the constant shape of the ultrasonic echo signal, the normalized envelope time difference method is used to detect the ultrasonic transit time, and a discrete numerical calculation algorithm flow is designed to reduce the impact of transit time detection of the signal attenuation characteristics. A theoretical analysis shows that the method can reduce the measurement error of the water level in terms of sound velocity and transit time. To verify the feasibility of the proposed method, an experimental prototype was developed, and a metrological verification experiment was carried out. The experimental results demonstrate that the error is <0.1 mm in the 400 mm range, showing that the proposed method can be widely used in high-precision water-level measurement in hydraulic physical model experiments.