This paper proposes an underwater signal processing method based on the combination of variational mode decomposition (VMD) and independent component analysis (ICA). In this method, the VMD is used to decompose a set of echo signals into groups of eigenmodal signals arranged according to the order of their frequencies. These modal signals are then used as an observation matrix for ICA to ensure the integrity of the separated target echo signals. In this method, the correlation between the decomposed modal signals and the original signal is used to select the signals which are used as input matrix rows for ICA. The signal-to-clutter ratio is used to determine the number of decomposed layers. The ICA is used to separate the scattering and target echoes, so as to recover the weak target echoes in the strongly scattered water and greatly improve the ranging accuracy. A 532 nm intensity-modulated continuous wave (CW) laser is used in the underwater ranging experiments. The attenuation coefficient of the water is changed by adding Mg(OH) ₂, ranging experiments are carried out at different attenuation lengths. The experimental results show that the signal processing method can be used to successfully measure the target within 9 AL (attenuation length) when the laser output power is 2.3 W, and the ranging accuracy is improved from 16 cm to less than 5 cm by using the algorithm. The proposed method can be applied to underwater lidar application in turbid water and long distance ranging underwater where the scattering dominates the echoes.