In terrain analysis and hydrological modeling, surface depressions (or sinks) in a digital elevation model (DEM) are commonly treated as artifacts and thus filled and removed to create a depressionless DEM. Various algorithms have been developed to identify and fill depressions in DEMs during the past decades. However, few studies have attempted to delineate and quantify the nested hierarchy of actual depressions, which can provide crucial information for characterizing surface hydrologic connectivity and simulating the fill-merge-spill hydrological process. In this paper, we present an innovative and efficient algorithm for delineating and quantifying nested depressions in DEMs using the level-set method based on graph theory. The proposed level-set method emulates water level decreasing from the spill point along the depression boundary to the lowest point at the bottom of a depression. By tracing the dynamic topological changes (i.e., depression splitting/merging) within a compound depression, the level-set method can construct topological graphs and derive geometric properties of the nested depressions. The experimental results of two fine-resolution LiDAR-derived DEMs show that the raster-based level-set algorithm is much more efficient (~150 times faster) than the vector-based contour tree method. The proposed level-set algorithm has great potential for being applied to large-scale ecohydrological analysis and watershed modeling.