A novel and efficient tandem SN2 nucleophilic substitution/Dieckmann condensation reaction of α-iodomethyl phosphine oxide with methyl thiosalicylate derivatives has been developed by using NaOH as a base, which enables the expeditious synthesis of 2-phosphonyl-3-hydroxybenzo[b]thiophene derivatives in moderate to high yields under simple conditions. This research provides not only a convenient method for the functionalization of benzo[b]thiophenes at the 2-position and 3-position but also new organophosphorus molecules. Furthermore, several new phosphonyl-substituted benzo[b]thiophenes were obtained from the resultant 2-phosphonyl-3-hydroxybenzo[b]thiophenes.