A new foaming strategy was proposed to prepare microcellular thermoplastic polyurethane (TPU) with high volume expansion ratio, low shrinkage and stable mechanical properties at low temperature by modulating micro-phase separation structure of TPU through the synergistic effect of water as co-blowing agent and polytetrafluoroethylene (PTFE). Molecular dynamics simulation was conducted to screen co-blowing agent (water) interacted well with CO₂ and TPU. The interaction of water and CO₂ improved the solubility of blowing agents in TPU. The hydrogen bond interaction between water and TPU regulated the arrangement of soft/hard segments and micro-phase separation structure. The volume expansion ratio of microcellular TPU at 100 °C and 15 MPa increased from 4.0 to 9.0 when the water content was 5 wt.%. The synergistic effect of water and PTFE improved the regularity of the hard segment. The water and in-situ fibrillated PTFE significantly improved the initial expansion ratio of microcellular TPU and effectively reduced the shrinkage. Eventually, microcellular TPU with 6.5-fold was prepared at 100 °C and its mechanical properties was evaluated.