The country's capital Baku has been linked with F1 for several months, but local political chiefs now suggest a contract has been agreed with Bernie Ecclestone to hold a street race in two years' time, a year after the former Soviet republic hosts the inaugural European Games.
Azad Rahimov, Azerbaijan's Minister of Youth and Sports, was quoted as saying by the Inside the Games website that an official announcement confirming the race will be made imminently.
"We have signed the deal with Bernie Ecclestone and will announce it officially with an event in Baku shortly," he said.
Baku has hosted Azerbaijan's first international motor races over the past two years: the non-championship Baku City Challenge took place on a 1.33-mile street circuit in 2012 and last year it held the FIA GT Series finale on a new 2.72-mile layout.
The city is scheduled to host the final round of this year's Blancpain Sprint Series, which takes over from FIA GTs, this November.
It has yet to emerge whether the grand prix would run on the streets of Baku or on an all-new F1 facility near the city.
Gary Watkins, sportscar correspondent
Baku would need to come up with a completely new circuit for Formula 1.
Neither of the tracks laid out on the streets of the Azerbaijan capital for its end-of-season GT races in 2012 and '13 could form the basis of an F1 venue.
The point-and-squirt circuit used in year was under a mile and a half in length and offered little challenge, while last season's 2.72-mile track was only homologated to FIA grade 3 and would be unsuitable for anything much faster than a GT3 car.
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