Quantification of the soil hydraulic conductivity is key to the study of water flow and solute transport in unsaturated soils. Rapid advances in measurement technology have provided a large number of observations at different scales, offering unprecedented opportunities and challenges for the estimation of hydraulic parameters. This paper proposes an inverse estimation method for downscaling of observations on coarse scales to estimate hydraulic parameters on high-resolution scales. Due to the significant spatial heterogeneity, the inversion faces the problems of dynamics-based integration of data at different scales, model uncertainty due to hundreds and thousands of parameters, and computational consumption due to the large number of forward simulations. To overcome these problems, this paper uses an efficient Bayesian optimization DREAM(ZS) as an inverse framework, and incorporates an analytical upscaling method and Karhunen–Loève (KL) expansion to infer finer-scale saturated hydraulic conductivity distribution conditioned on coarse-scale measurements. The efficient upscaling method is used to link measurements and hydraulic parameters at different scales, and Karhunen–Loève (KL) expansion is incorporated to greatly reduce the dimension of the parameter to be estimated. To further improve the efficiency of the inversion, a locally one-dimensional (LOD) algorithm is used to solve the multidimensional water flow model at coarse scales. The proposed inverse model is applied in a series of numerical experiments to demonstrate its applicability and effectiveness under different flow boundary conditions, different levels of ratio between coarse- and fine-scale grids, different densities of observation points, and different degrees of statistic heterogeneity of soil mediums.