No Towels in Bathwater (タオルを湯船に入れない - Taoru o irenai)
You must never let your towel touch the communal bathwater. This includes small hand towels and privacy cloths, preventing fibers, soap residue, or dirt from contaminating the pure mineral water.
In Japanese bathing culture, the tub is a sacred zone purely for soaking and relaxing, not washing. Towels are treated as external impurities, even if they are brand new and freshly washed.
When soaking, fold your small hand towel and balance it on top of your head, or place it on the dry stone ledge next to the tub. Never squeeze or rinse the towel inside the bath water.
What is the correct way to handle your hand towel while soaking in an onsen?