The eruption occurred Sunday evening near the island of Dashlyg in the vicinity of offshore oil and gas fields, with plumes of fire reaching 100 metres (330 feet) above the sea, Azerbaijan's national seismological centre said in a statement.
The Caucasus nation's emergency service said "helicopters are conducting flights above the Caspian Sea to study the eruption's impact".
"There is no threat to oil and gas infrastructure or the lives of people," it added.
Video distributed by the emergency services Monday showed smouldering flames surrounded by brown mud deposits in Caspian waters.
That was hours after amateur footage circulating social media Sunday evening showed a glowing fireball above the sea's surface.
Azerbaijan's State Oil and Gas Company (SOCAR) said the eruption had not damaged infrastructure, which "continues operating normally".
Azerbaijan is home to nearly a third of the world's 1,700 mud volcanoes, both underground and underwater, according to a study by Russia's Institute of Geology.
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