Minimal waterproofing requirements in water conservancy projects expose rocks to groundwater erosion for long periods of time. To study the mechanisms by which liquid water degrades rock mechanical properties, uniaxial compression experiments were conducted on defect-containing sandstones. In these experiments, acoustic emission (AE) and digital image correlation (DIC) techniques were used to reveal crack types and crack development paths. AE hits were used to characterize damage in the rock; AE peak frequencies and Rise Angle-Average Frequency density maps were used to depict the proportions of tensile and shear cracks. The experimental results showed that as the water content increased, the soluble material between the crystals dissolved, the proportion of tensile cracks increased, and the generation of intergranular cracks intensified. These processes led to the smoothing of crack surfaces. The DIC results revealed that during the stage of steady crack development, lateral cracks were generated at the ends of pre-existing defects. Graphs of length and width variations in the pre-existing defects exhibit a “camelback” shape. The first peak records the generation of lateral cracks. After vertical cracks appear, the curve ascends until final failure occurs. The presence of flaws within a rock affects stress distribution: stress concentrates at the tips of these flaws, facilitating the formation of both vertical and lateral cracks. To eliminate experimental randomness, an inversion study was carried out using Particle Flow Code. The numerical results revealed that the lateral cracks were dominated by shear cracks and the vertical cracks were dominated by mixed tensile-shear cracks. Crack types and trends in rock particle motion were analyzed to quantitatively establish the crack formation law. The results of the study provide a reference for rock stability in underground water conservancy projects.