The blast followed by a fire occurred shortly after midnight on the INS Sindhurakshak submarine. Many sailors on board the submarine reportedly jumped off to safety.
"There is likelihood of some personnel being trapped inside. The details are being ascertained," an official defence ministry statement issued at 3.15 a.m. said.
The details of other casualty figures were not immediately available though some injured sailors have been rushed to naval hospital INHS Ashvini in Colaba.
The cause of the explosion and blaze, as well as the extent of damage to the submarine and naval properties, is still not known.
At least 16 fire tenders of Mumbai Fire Brigade and Mumbai Port Trust were rushed to assist the naval fire brigade to douse the conflagration, the smoke emanating from which could be seen in many parts of south Mumbai.
A fire brigade official said that around 3 a.m., the blaze had been brought under control and prevented from spreading to other vessels docked in the vicinity.
The blast was first heard ashore by deputy chief fire office P.S. Rahandale who was on leave and attending a private engagement near the Gateway of India promenade. He immediately alerted the fire brigade and other emergency services.
An inquiry has been ordered to determine the cause of the accident, officials said.