One of the core challenges of intelligent fault diagnosis is that the diagnosis model requires numerous labeled training datasets to achieve satisfactory performance. Generating training data using a virtual model is a potential solution for addressing such a problem, and the construction of a high-fidelity virtual model is fundamental and critical for data generation. In this study, a digital twin-assisted dynamic model updating method for fault diagnosis is thus proposed to improve the fidelity and reliability of a virtual model, which can enhance the generated data quality. First, a virtual model is established to mirror the vibration response of a physical entity using a dynamic modeling method. Second, the modeling method is validated through a frequency analysis of the generated signal. Then, based on the signal similarity indicator, a physical–virtual signal interaction method is proposed to dynamically update the virtual model in which parameter sensitivity analysis, surrogate technique, and optimization algorithm are applied to increase the efficiency during the model updating. Finally, the proposed method is successfully applied to the dynamic model updating of a single-stage helical gearbox; the virtual data generated by this model can be used for gear fault diagnosis.