A water-assisted method is used to reduce heat accumulation during the ultrafast laser drilling of metals. To understand the complex material ablation mechanism, an underwater percussion drilling process using an ultrafast laser with pulse energy below the water breakdown threshold was investigated. The laser-induced plasma (LIP) was recorded using a high-speed camera, and the ablation morphology was characterized. The material removal mechanism in air and underwater was studied using metallurgical analysis. A numerical model including plasma formation by a single pulse and plasma evolution by multiple pulses was established to quantitatively describe the effects of LIP on the energy attenuation and beam refraction. This model can predict the hole radius and depth in underwater drilling and explain the difference in drilling performance in air and underwater.