The U.S. Navy later accused Iran of targeting the ships with limpet mines, timed explosives typically attached by divers to a vessel's hull.
Firefighters tried to contain the blaze, which ignited around 2:25 a.m., but efforts to save the Kharg - named after the island that serves as the main oil terminal for Iran - were unsuccessful, according to the Fars and Tasnim news agencies.
Around 20 people received minor burn injuries, but no one was seriously hurt in the incident before the burning vessel was evacuated, a government spokesman told the Tasnim news agency, adding that the cause of the fire was still being investigated.
Fars published video of thick, black smoke rising from the ship early on Wednesday morning.
The Iranian navy's largest warship caught fire and sank Wednesday in the Gulf of Oman, according to reports. The vessel was delivered to Iran in 1980, a year after the 1979 Revolution, and became operational in 1984 when Britain issued an export license for the ship after lengthy negotiations. The Kharg - sometimes spelled "Khark" - was one of Navy's few ships capable of replenishing other ships at sea.
Garbine Muguruza upset by Marta Kostyuk at the 2021 French Open
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The military vessel was being deployed to global waters for a training naval operation when one of its systems caught fire near the port of Jask.
Kharg - an auxiliary ship with fuel tanks and dry cargo that can supply both fuel and dry stores at sea - was ordered by Iran from the United Kingdom in 1974 and launched in 1977. However, it comes after a series of mysterious explosions that began in 2019 targeting ships in the Gulf of Oman.
The sinking of the Kharg marks the latest naval disaster for Iran. The incidents came amid heightened tensions between the USA and Iran after then-President Donald Trump unilaterally withdrew America from Tehran's nuclear deal with world powers.
Saviz, a ship operated by Iran's Revolutionary Guards, was attacked, possibly by a limpet mine, in the Red Sea on April 6 off the coast of Eritrea.
Last year, an Iranian naval vessel mistakenly hit another with a missile during a training exercise near Jask, killing 19 sailors and wounding 15 others. And two years prior, in 2018, an Iranian destroyer sank.