Highly energetic thermite reactions could be useful for a variety of combustion and material-processing applications, but their usability is yet limited by their hard ignition conditions. Furthermore, in virtue of their zero-oxygen balance, exothermic thermite reactions may also occur underwater. However, this feature is also hard to utilize because of the hydrophobic properties of the thermite powder, and its tendency to agglomerate on the water surface rather than to sink into the water. The recently discovered bubble-marble (BM) effect enables the insertion and confinement of a thermite-powder batch into water by a magnetic field. Here, we present a phenomenon of underwater ignition of a thermite-BM by localized microwaves. The thermite combustion underwater is observed in-situ, and its microwave absorption and optical spectral emission are detected. The vapour pressure generated by the thermite reaction is measured and compared to theory. The combustion products are examined ex-situ by X-ray photo-electron spectroscopy which verifies the thermite reaction. Potential applications of this underwater combustion effect are considered, e.g., for detonation, wet welding, thermal drilling, material processing, thrust generation, and composite-material production, also for other oxygen-free environments.