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The fate of 18 persons onboard the submarine is being ascertained, a Navy official said.
The Indian defence minister is expected to make a statement in the Indian Parliament soon about the incident.
The Chief of Indian navy is arriving at the site of tragedy in Mumbai to take stock of the situation.
An explosion resulting in a major fire took place on board INS Sindhurakshak, a Russian Kilo class submarine of the Indian Navy, shortly after midnight, a defence spokesperson said.
Fire tenders from the Naval dock yard as well as the Mumbai Fire Brigade were immediately pressed into action, he said.
The cause of the explosion and blaze, as well as the extent of damage to the submarine and naval properties, is still not known.
A Board of Inquiry is being instituted to investigate into the causes of the accident, he said.
The Russian made submarine had just returned to India after a refit.
The torpedo-firing INS Sindhurakshak, built in 1997, had been equipped with the tube-launched Club-S cruise missiles effective against surface vessels and submarines at a range of about 200 km.
Source: Agencies