When you wash them put some baking soda and white vinegar in the wash water and put some white vinegar in the water during the rinse cycle. Or you can use Borax during the wash cycle (green and white box in the laundry soap aisle).
You could either wash them in bleach with a tablespoon of white vinegar or purchase some Febreeze fabric freshener and spray them until damp, either should help the smell.
Use bleach when you wash the towels, and fabric softener. Then dry with a scented dryer sheet, and put them in a cabinet with plenty of ventilation. Add mothballs to the cabinet.
