Local civic dignitaries, including the mayor and council leader were on board HMS Astute, which is visiting Southampton, Hampshire, at the time of the incident.
The Ministry of Defence said the shooting was not terrorist-related and there was no threat to the wider public.
An MoD spokesman said: "Two Royal Navy personnel have been involved in a firearms incident at Southampton docks where HMS Astute is alongside. Sadly, one has now died as a result of his injuries. The Royal Navy is now attempting to inform their families as a matter of urgency.
"A third Royal Navy serviceman has been arrested by Hampshire Constabulary and is now in custody. This incident was not terrorist-related and there is no threat to the wider public."
Defence Secretary Dr Liam Fox said: "I am greatly saddened to hear of this tragic incident and of the death of a Royal Navy serviceman. It is right and proper that a full police investigation is carried out and allowed to take its course. My thoughts and sympathies are with those who have been affected and their families."
It is understood that the two victims were male officers and the shooting was carried out with an SA80 service rifle. The gunman is thought to have been on sentry duty and the shooting happened during a weapons changeover between shifts.
After the shooting, it is understood the gunman was grabbed by other navy personnel who handed him over to Ministry of Defence Police who were there as part of the civic visit. He was then transferred to Hampshire police officers when they arrived minutes later.
Southampton City Council's leader Royston Smith, mayor Carol Cunio and chief executive Alistair Neill were among a group of six local dignitaries on board HMS Astute at the time of the shooting. They were not hurt.
The seriously injured navy crew member was taken to Southampton General Hospital, South Central Ambulance Service said. Chief Superintendent David Thomas, of Hampshire Police, said the injured man was now in a "stable condition".
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