Wet towels typically smell bad because they have become a breeding ground for germs, mildew and mold. As these organisms grow in the warm, moist environment of a wet towel, they emanate a smell. This occurs especially when wet towels are not hung up to dry after use, facilitating bacterial growth and odor.
According to Home Ec 101, wet towels also often pick up bacteria and mildew while being washed, particularly in front-loading washers that can harbor mildew. Using too much detergent during the wash cycle can also facilitate bacterial growth, since extra detergent molecules that are not absorbed into the wash water solution tend to attract germ growth.
Towel odor can be removed by running the towels through the wash with a cup of vinegar added to the rinse cycle or 1/2 cup of baking soda used in place of detergent. Adding borax to the wash cycle also helps to remove odor.
Line drying towels, if weather permits, rather than putting them in the dryer also helps to remove odor. The drawback to line drying towels is that the fabric often ends up feeling stiff and uncomfortable. A remedy for this problem is to toss the dry towels back into the dryer along with one or two tennis balls, which serves to fluff up the towels and make them soft again.