Percussion drilling has been widely used in oil and gas industry, yet it still has some shortcomings, such as severe damages to drilling tools, low energy transferring efficiency and low rock-fragmenting efficiency. Thus it is necessary to reveal the mechanism of interactions between the hammer bit and rock in geophysical prospecting percussion drilling. Taking account of the coupling effect of the Weight on Bit (WOB), impact force and rotary torque, this paper constructed a Finite Element Method (FEM) model using the finite element analysis software (ANSYS/LS-DYNA) and conducted a computer simulation of bit-rock interaction under rotating and simple impact effect, which showed the rock-fragmenting process of hammer bit and the curves of volume-time and depth-time of craters as well as the effective stress-time curves of the centre tooth, second-row tooth and peripheral tooth. The results showed that: the percussion drilling process under rotating impact effect is characterized as four fundamental processes; the crater depth mainly depends on impact force rather than rotary torque; the crater created under rotating impact effect is twice the volume of that under impact effect; the effective stress of each tooth changes severely: the stress of second-row tooth is the largest, centre tooth the second, and peripheral tooth the smallest. This study provided a guide for the structural optimization of hammer bit and general applications of percussion drilling.