Inelastic off-fault deformation can lead to large tsunamigenesis in different tectonic settings. Here a mechanism for tsunami generation by strike-slip earthquakes that involves dynamic off-fault failure at restraining bends is presented. Dynamic rupture on a vertical strike-slip fault is modeled with undrained inelastic off-fault response incorporated by the Drucker-Prager yield criterion. I show that in a local transpressive stress regime dynamic off-fault failure at restraining bends produces significantly larger and more localized surface uplift than is produced by purely elastic dislocation models, resulting in a positive flower and coseismic pop-up structure. The larger uplift is due to frictional sliding with a thrust component on conjugate microfractures, modeled by inelastic deformation. The short-wavelength inelastic uplift, largely controlled by bend size, is shown to generate localized tsunami efficiently in a shallow bay by fully coupling dynamic rupture, ocean acoustic waves, and tsunami. Fully-coupled models also indicate that supershear rupture on a vertical planar strike-slip fault does not generate large tsunami as the large kinetic energy of supershear rupture is carried away by ocean acoustic waves. Dynamic off-fault failure at fault complexities, such as restraining bends and compressional stepovers, may need be urgently incorporated in the current tsunami hazard assessments in strike-slip environments. •Dynamic off-fault failure produces efficient localized surface uplift at strike-slip restraining bends.•The direction of the minimum compressive stress controls the efficiency of inelastic uplift.•Inelastic uplift at restraining bends generates localized tsunami efficiently in shallow water.•Supershear rupture on a vertical planar strike-slip fault does not produce large tsunami.