We propose a system dynamic approach for improving the stability of wire electrical discharge machining (WEDM). The approach includes wire spool inertia isolation and a damped sandwich mechanism, which increase the fundamental frequency and damping coefficient of the system, respectively. Thus, the wire tension stability is also improved. We establish a dynamic model to simulate the dynamic behavior of the wire transport system. Then the wire tension stability is optimized through tuning the damping material parameters of the damped sandwich mechanism. The mechanism was mounted on a commercial WEDM machine to show the benefits in terms of wire tension and machining precision. Results show that the maximum overshoot of wire tension was reduced by 51% and the steady-state wire tension variation was improved from 176 to 48 gf. When cutting 10-cm-thick SKD11 tool steel, the deviation from a straight line was reduced by 45%.