Realistic behavior of computer generated characters is key to bringing virtual environments, computer games, and other interactive applications to life. The plausibility of a virtual scene is strongly influenced by the way objects move around and interact with each other. Traditionally, actions are limited to motion capture driven or pre-scripted motion of the characters. Physics enhance the sense of realism: physical simulation is required to make objects act as expected in real life. To make gaming and virtual environments truly immersive,it is crucial to simulate the response of characters to collisions and to produce secondary effects such as skin wrinkling and muscle bulging. Unfortunately, existing techniques cannot generally achieve these effects in real time, do not address the coupled response of a character's skeleton and skin to collisions nor do they support artistic control. In this dissertation, I present interactive algorithms that enable physical simulation of deformable characters with high surface detail and support for intuitive deformation control. I propose a novel unified framework for real-time modeling of soft objects with skeletal deformations and surface deformation due to contact, and their interplay for object surfaces with up to tens of thousands of degrees of freedom.I make use of layered models to reduce computational complexity. I introduce dynamic deformation textures, which map three dimensional deformations in the deformable skin layer to a two dimensional domain for extremely efficient parallel computation of the dynamic elasticity equations and optimized hierarchical collision detection. I also enhance layered models with responsive contact handling, to support the interplay between skeletal motion and surface contact and the resulting two-way coupling effects. Finally, I present dynamic morph targets, which enable intuitive control of dynamic skin deformations at run-time by simply sculpting pose-specific surface shapes. The resulting framework enables real-time and directable simulation of soft articulated characters with frictional contact response, capturing the interplay between skeletal dynamics and complex,non-linear skin deformations.