This paper studies the anti-seepage failure of compacted clay layer (CCL) during wetting-drying cycles in a landfills cover system. The permeability and microstructure tests are conducted. The effects of wetting-drying cycles, degree of compaction and specimen size on permeability coefficient of CCL are discussed. The essence of anti-seepage failure is revealed at microscopic level. The research results show that the permeability coefficients of two size specimens are the same before wetting-drying cycles, but the increments of permeability coefficient of CCL with different degrees of compaction and specimen sizes are different after three times of wetting-drying cycles. The high-compacted and low-compacted small-size specimens both show shrinkage but no crack during wetting-drying cycles. For small-size specimens, the microscopic structural damage and the increment of permeability coefficient of high-compacted clay are larger than those of low-compacted clay. Unclosed cracks in large-size specimens result in larger increment of permeability coefficient than those in small-size specimens with the same degree of compaction. The small-size specimens can not reflect the influence of shrinkage cracks on the permeability of CCL. Therefore the permeability results of small-size specimens are not suitable for evaluating long-term seepage capacity of CCL.