The device was spotted during a routine sonar survey by Sula Diving on Saturday for Orkney Islands Council.
Royal Navy divers travelled to the area from their Faslane base on the Clyde to examine video of the torpedo and inspect it on the seabed.
Ships have been warned not to anchor near it and divers were told to stay away, but the object is said to pose no threat.
Navy divers marked its location and are to return later to dispose of it.
Scapa Flow, off Orkney, was used as a Royal Navy base in both world wars and is now popular with divers due to the British and German wrecks lying on the seabed.
More than 50 German ships were scuppered there at the end of the 1914-18 war by their captains to stop them being divided among the Allies.
It is also the site of the wreck of the Royal Oak, a Revenge-class battleship torpedoed by a U-Boat on 14 October, 1939, with the loss of 883 lives.
Experts believe the newly discovered torpedo is linked to that attack.
Brian Archibald, Orkney’s harbour master, said: “Now that we know that the torpedo is German, we believe it is highly likely that it was among those fired at HMS Royal Oak by the U-47 in October 1939.
“It’s location in Scapa Flow is in the vicinity of the area where, from historical accounts, U-47 is thought to have carried out the attack.”
Lieutenant Commander Tony Hampshire said the dive to examine the torpedo was a poignant one for his Northern Diving Group team as members travel to Orkney each year to visit the wreck of the Royal Oak, an official war grave, in an act of remembrance.
He said: “Northern Diving Group has the honour of diving and placing the White Ensign on the wreck of Royal Oak.
“It is a task the group has conducted for many years and one which we are proud to participate in.
“To think that this torpedo could have been one fired at HMS Royal Oak brings the tragedy home.”
He added: “While it wouldn’t be safe to preserve the torpedo whole, once we return to the scene we will explore the possibility of preserving one of the fins or perhaps a propeller blade.”