Britain said on Wednesday that its Royal Navy had tracked the ship about 45 miles (72 kilometres) off its coast, saying the vessel was being used for "gathering intelligence" and had been mapping critical underwater infrastructure.
The accusations come with concern about the sabotage of underwater communications links between NATO countries, blamed on Russia.
In a statement cited by Russian state news agencies, Moscow's embassy in London said: "The accusations made by the British defence establishment against Russia of creating some kind of threat to the underwater communications of the country and its NATO allies are absolutely untenable. Such threats never come from Russia."
It accused London of "inflaming tensions" in the Baltic and North Sea.
The Kremlin had earlier declined to comment on the issue.
British Defence Secretary John Healey told parliament on Wednesday that the Yantar ("Amber" in Russian) had been "mapping the UK's critical underwater infrastructure".
"I also wanted President Putin to hear this message: 'We see you, we know what you're doing and we will not shy away from robust action to protect this country'," he told MPs.
Healey said it was the second time the Yantar had been detected in British waters in recent weeks, after it was spotted in November.
Several undersea telecom and power cables have been severed in the Baltic Sea in recent months, with experts and politicians accusing Russia of orchestrating a hybrid war.
The sabotage has been blamed on a "shadow fleet" of vessels -- often ageing and operating under opaque ownership -- that carry Russian crude oil and petroleum products, embargoed since the invasion of Ukraine.
The most recent incident occurred on December 25, when the Estlink 2 electricity cable and four telecom cables linking Finland and Estonia were damaged.
That came just weeks after two telecom cables in Swedish waters were severed on November 17 and 18.
Asked about Healey's statement, Kremlin spokesman Dmitry Peskov said on Thursday: "I do not have information on what this is about in detail. So I would not comment on this."
Relations between Moscow and London have been frosty for years, with Russia singling out the UK as one of the most hostile Western countries, but have dipped to new lows since Russia launched its military offensive on Ukraine.
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