The interaction between marine propellers and sediment-laden seabeds is of significant importance for navigation safety, environmental protection, and the hydrodynamic performance of marine vehicles operating in shallow waters. In this study, wake evolution and mud entrainment of the National Research Council of Italy-Institute of Marine Engineering (CNR-INM) E779A propeller in a water–mud stratified environment are studied via improved delayed detached eddy simulation combined with the volume of fluid. The numerical methodology is first validated against available experimental data for propeller open-water performance and wake flow characteristics. The effects of the water–mud interface on propeller hydrodynamic loads, vortex evolution, turbulence transition, and sediment transport are subsequently analyzed. The results show that the presence of the mud layer induces pronounced periodic fluctuations in thrust, torque, and lateral forces due to the asymmetric interaction between the propeller wake and the water–mud interface. Compared with open-water conditions, the mud environment reshapes propeller wake evolution by suppressing secondary tip-vortex pairing, triggering earlier vortex instability and faster wake breakdown. Correspondingly, Reynolds stress redistribution is enhanced, and the turbulence structure transitions more rapidly from anisotropic to isotropic states, promoting momentum exchange across the interface. These modifications of wake dynamics substantially increase sediment entrainment and transport, resulting in intensified mud diffusion within the propeller slipstream. The present study reveals the fundamental role of wake instability in governing sediment entrainment processes in water–mud stratified environments and provides new insights into propeller-induced seabed interactions in shallow waters.