A diesel-powered Indian submarine exploded and sank early Wednesday in a dock in Mumbai, leaving rescuers scrambling to find 18 sailors who were on board.

The INS Sindhurakshak had been returned by Russia less than a year ago after a major refit and was submerged after the accident, navy sources said.

The accident comes just days after New Delhi trumpeted the launch of its first domestically produced aircraft carrier and the start of sea trials for its first Indian-made nuclear submarine.

Grainy and shaky amateur video footage taken by a witness showed the fierce explosion which lit up the sky at the naval dockyard shortly after midnight.

"The cause of the explosion is not known. We are searching for the 18 personnel," navy spokesman Narendra Kumar Vispute told AFP.

He said divers had been deployed once the flames were extinguished by fire trucks which rushed to the scene and battled the blaze for several hours.

"Some sailors and other personnel who were in the vicinity of the submarine have been admitted to INHS Asvini (naval hospital) with injuries," said navy spokesman PVS Satish.

"Eighteen sailors were on board the submarine, they have not been evacuated yet," Satish told AFP.

In February 2010, the INS Sindhurakshak also suffered a fire while docked in Visakhapatnam city in southern India, killing a 24-year-old sailor and leaving two others with burns.

"There were two to three explosions and the night sky lit up briefly," said eyewitness Dharmendra Jaiswal, who manages a public toilet near the dockyard and was sleeping there overnight.

"There was a lot of smoke and I thought it was some major repair work," he told AFP.

There were fears that the explosion Wednesday might have damaged other navy vessels in the dockyard, a colonial-era facility with civilian and military sections that employs more than 10,000 people.

The navy ordered an inquiry into the cause of the explosion.

Rahul Bedi, a defence expert with IHS Jane's Defense Weekly, told AFP the submarine was commissioned from Russia in 1997 and lacked some modern safety equipment common to newer vessels.

"They don't have escape routes in the event of accidents unlike some of the modern submarines," he said.

"The major concern is of India's submarine capability depreciating fast. I think out of 14 diesel-electric subs, 12 are operational," he said.

"That's very inadequate and a big operational drawback for the Indian navy," he added.

C. Uday Bhaskar, a retired naval officer and former director of the National Maritime Foundation in New Delhi, also called it a "major setback".

"For every submariner this is one of the worst-case scenarios," he told NDTV.

India has been expanding its armed forces rapidly to upgrade its mostly Soviet-era weaponry and react to perceived threats from regional rival China.

The Mumbai dockyard, which is a restricted area, was closed to media.

INS Sindhurakshak is a kilo-class submarine which normally operates with a crew of 53 people and can sail on its own for 45 days, the Indian navy website says.

Russia is still the biggest military supplier to India, but relations have been strained recently by major delays and cost over-runs with a refurbished aircraft carrier, the INS Vikramaditya.