Underwater laser hardening might produce better surface mechanical properties than conventional laser hardening in air due to additional cooling effect by water. However, it has not been studied in detail. This study investigates the effect of water layer on laser surface hardening of AISI 1055 steel. It is found that laser surface hardening is feasible with water layer up to 3mm above the steel surface. A higher surface hardness is achieved during underwater processing. This is attributed to fast cooling by water which facilitates complete martensitic transformation. Nevertheless, the hardened area is smaller than that in conventional laser hardening in air due to attenuation of laser energy. Above 3mm, the laser beam is severely attenuated due to formation of vapor plume. Furthermore, it is found that surface oxidation cannot be prevented completely even during underwater treatment, and the water movement results in random distribution of metal slag on the surface.