The 44-year-old submarine, KRI Nanggala-402, was conducting a torpedo drill north of the island of Bali on Wednesday but failed to relay the results as expected, a navy spokesman said.
An aerial search found an oil spill near the submarine’s dive location and two navy vessels with sonar capability had been deployed to assist in the search, officials said.
A navy spokesman said the diesel-powered submarine that runs on electric batteries while submerged could sustain a depth of 250-500 metres (820-1640 ft).
“Anything more than that can be pretty fatal, dangerous,” First Admiral Julius Widjojono told KompasTV.
In a statement on Wednesday, the navy said: “It is possible that during static diving, a blackout occurred so control was lost and emergency procedures cannot be carried out and the ship falls to a depth of 600-700 metres.”
The seas in the area are shallower than in other parts of the archipelago but can be more than 1,500 metres deep.
The defence ministry said Australia, Singapore and India had responded to requests for assistance.
Australian Foreign Minister Marise Payne said Australia would “help in any way we can”.
“We operate very different submarines from this one, but the Australian Defence Force … will work with defence operations in Indonesia to determine what we may be able to do,” Payne told ABC radio.
Indonesian military chief Hadi Tjahjanto told Reuters in a text message on Wednesday that contact with the vessel was lost at 4:30 a.m. and a search was underway 60 miles (96 km) off Bali.
The oil slick could indicate damage to the vessel or could be a signal from the crew, the navy said.
The 1,395-tonne KRI Nanggala-402 was built in Germany in 1977, according to the defence ministry, and joined the Indonesian fleet in 1981. It underwent a two-year refit in South Korea that was completed in 2012.
Indonesia in the past operated a fleet of 12 submarines bought from the Soviet Union to patrol the waters of its sprawling archipelago.
But now it has a fleet of only five including two German-built Type 209 submarines and three newer South Korean vessels.
Indonesia has been seeking to modernise its defence capabilities but some of its equipment is old and there have been deadly accidents in recent years