HMAS AE1 vanished off the New Guinean island of New Britain on 14 September 1914, with 35 crew on board from Australia, New Zealand and Britain.
It was the first Allied submarine loss of the war and the first wartime loss for the Royal Australian Navy.
The exact reason for its sinking remains unclear.
AE1 made final contact with an Australian ship at 2.30pm on the day it disappeared.
Villagers on a nearby island at the time spoke of seeing a "monster" or "devil fish" that appeared and quickly disappeared into the water.
But it has always been assumed it was not a victim of enemy action, since the only German vessel nearby at the time was a small survey ship.
A dozen unsuccessful searches have been carried out over the years.
However, Australian defence minister Marise Payne said on Thursday that it had been located more than 300 metres (984ft) below the surface in a search using a Dutch-owned survey vessel that started only last week.
Ms Payne said the Australian government was now trying to contact descendants of those killed on board.
"It was the first loss for the RAN and the first Allied submarine loss in World War I - a significant tragedy felt by our nation and our allies," Ms Payne said in a statement.
A commemorative service was held to remember those who died after the submarine was found.
Australian War Memorial director Dr Brendan Nelson, said: "Finding AE1 represents one of the most significant and practically meaningful events of Australia's commemoration of the First World War."