Sri Lanka's deputy foreign minister identified the warship as the frigate IRIS Dena and said it was heading back to Iran from an eastern Indian port.
The attack happened in the Indian Ocean, hundreds of kilometres from the Gulf where US and Israeli forces are striking Iran and it is retaliating with missile and drone attacks.
"An American submarine sank an Iranian warship that thought it was safe in international waters," US Defense Secretary Pete Hegseth said at the Pentagon.
"Instead, it was sunk by a torpedo."
Hospital authorities in the Sri Lankan port city of Galle said 87 bodies were brought in by military rescuers who responded to an early morning distress call.
Another 32 were rescued and were being treated at hospital and about 60 people were likely unaccounted for from an estimated 180 people on board, Sri Lankan authorities said.
A Pentagon video purporting to have captured the attack showed the warship being hit by a huge explosion which blew apart the rear of the vessel, lifting it from the water, and caused it to begin sinking from the stern.
The Iranian vessel had taken part in a naval exercise organised by India in the Bay of Bengal from February 18 to 25, according to the drill's website.
Sri Lanka said it had launched a search-and-rescue operation to locate survivors after receiving a distress call.
Sri Lankan navy spokesman Commander Buddhika Sampath said boats that reached the location observed only an oil slick, adding that although the incident took place outside Sri Lankan waters, the country's authorities were still committed to providing support.
"We found people floating in the water and rescued them," Sampath told reporters.
"Later on, we found upon inquiring that they belonged to the Iranian ship."
Rescuers brought bodies, covered in white sheets, in batches in a truck to the Karapitiya hospital in Galle where they were moved to the morgue.
The commander of the warship and some senior officers were among the survivors and they told the Sri Lankan navy that they were hit by a submarine attack, two Sri Lankan sources told Reuters.
Meanwhile, NATO air and missile defence systems stationed in the eastern Mediterranean destroyed a ballistic missile fired from Iran as it headed into Turkish airspace after passing Syria and Iraq, the Turkish defence ministry said.
The incident marks the first time that NATO member Turkey, Iran's neighbour to the northwest, has been drawn into the expanding conflict between Iran and the United States and Israel that now involves several countries in the region.
"We warn all parties to refrain from actions that would lead to further escalation of conflict in the region. In this context, we will continue to consult with NATO and our other allies," the ministry said, adding there were no casualties or injuries.
"All necessary steps to defend our territory and airspace will be taken resolutely and without hesitation. We remind all parties that we reserve the right to respond to any hostile actions against our country," it added.
Two other initial statements by senior Turkish officials about the incident did not mention NATO's Article 4, which states that allies will "consult together whenever, in the opinion of any of them, the territorial integrity, political independence or security" of a member is threatened.
The missile was "neutralised" by NATO systems, Turkish presidency official Burhanettin Duran said in a statement on X.
with AP and DPA
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