The invention provides a water-blocking and flame-retardant composite film for package of a lithium battery. The water-blocking and flame-retardant composite film comprises a modified aluminum foil base layer and flame-retardant layers, wherein the flame-retardant layers are arranged on an upper surface and a lower surface of the modified aluminum foil base layer, thermoplastic resin layers are arranged at outer sides of the flame-retardant layers, each flame-retardant layer is formed by uniformly dispersing a flame-retardant agent in an adhesive, a surface of the modified aluminum foil base layer is passivated and is modified for two times by employing an organic silicone oil waterproof agent, and the thermoplastic resin layers are pasted onto the aluminum foil base layer by the flame-retardant layers and then are laminated to form an aluminum plastic film. According to the water-blocking and flame-retardant composite film for package of the lithium battery and the preparation methodof the composite film, provided by the invention, the prepared composite film has high water-blocking and flame-retardant performance, and the process is simple in preparation flow and low in cost.