So why do they carry a towel to the top, chuck it in to the water, dive, and get out and ‘dry’ themselves with the wet towel 😕

Modesty (like the race numbers in triathlon)

I think they are dipping them in warm water. They try to keep their muscles warm between dives.

so they can flick the other divers’ arses when they get back to the changing rooms

Scaredypants has it..

Chamois leather to dry themselves with, easy to wring out once dry. After the competition they roll them up into tubes and throw them with a little flick to make them spin. You win if it goes in vertically.