Sonar images show the World War One submarine largely intact after it was found by engineers laying undersea power cables.
Although experts believe the vessel is a UB-85 sunk by HMS Coreopsis in 1918, naval folklore says it may have been attacked by a "sea monster".
The crew of the U-boat abandoned ship and were picked up by the British Navy's HMS Coreopsis, where their commander described the encounter.
He is said to have revealed the beast had "large eyes, set in a horny sort of skull with teeth that could be seen glistening in the moonlight".
HMS Coreopsis | Image: International War Museum
Historian and nautical archaeologist Dr Innes McCartney said the submarine's discovery - off the coast of Stranraer in southwest Scotland - could reveal the mystery of its final hours.
He said at least 12 British and German submarines had been sunk in the Irish Sea.
Mr McCartney said: "The features of this particular wreck, which is largely intact, confirm it is a UBIII-Class submarine, of which we know of two which were lost in the area - the more famous UB-85 and its sister boat UB-82.
"While I can conclude that this wreck is likely to be one or the other, they would be practically impossible to tell apart, aside from the numbers painted on them in service, now obviously long gone.
"Unless a diver can find a shipyard stamp, we cannot say definitively, but yes, we're certainly closer to solving the so-called mystery of UB-85 and the reason behind its sinking - whether common mechanical failure or something that is less easily explained."
Sonar scan of submarine | Image: Scottish Power
Speculation about sea monsters was fuelled by the secrecy surrounding what happened during the first U-boat war and stories resulted from journalists and ex-Navy men "talking late at night and having a nice time," Mr McCartney said.
He added: "I don't think it was a sea monster. I like the idea of Nessie doing her bit for the war effort but in reality the real sea monster was the U-boat."
The discovery was made by engineers working on a project to lay an undersea power line which will carry renewable energy produced in Scotland to England and Wales.