I vote towel - you can't see any signs of structure and the hem is too short for a dress of that time. Plus, the hem leans down on one side suggesting something that is being held rather than an actual hem. The fabric also reads like terry towelling cotton.
Linda, if you have the actual photo, why not scan it at a high res and blow it up and see the detailing? I'm sure you'll have the answer.
For example, if this was a dress, it's a very fitted style so there will be evidence of bust shaping, seams, darts etc.
I wonder if this was one of a series and in the next photo she drops the towel to reveal either a strapless swimsuit or perhaps *gasp* nudity!