Time delay estimation (TDE) of acoustic emission signals can be used to locate the corrosion in oil storage tank bottom. Multipath propagation is inevitable and affects the accuracy of TDE in a confined underwater space. A new time delay estimation method based on generalized cross correlation with truncated signals was proposed. Curve fitting was used to estimate the time of arrival of the received signals. The signals were truncated to suppress multipath and generalized cross correlation based phase transform (PHAT) was applied to estimate the time delay. Experimental results show that the method can reduce the effect of multipath effectively and improve the performance of TDE.