Armenia's Foreign Ministry has threatend "grave consequences" after Azerbaijani forces shot down one of its military helicopters.

Wednesday's development will fuel fears of a major escalation of the long-standing conflict over Nagorny Karabakh, a region of Azerbaijan controlled by ethnic Armenians.

The downing is the most serious military incident along the Karabakh frontier since the 1994 ceasefire that ended a bloody war that cost 30,000 lives over the disputed region.

Armenian media reported that the helicopter's three crew members were all killed.

"A MI-24 combat helicopter attempted to attack positions of the Azerbaijani army near [Karabakh's] Agdam district," Azerbaijan's Defence Ministry said in a statement.

"The helicopter has been shot down by the Azerbaijani army."

The ministry said the wreckage fell on territory held by ethnic Armenians.

The Azeris also said that an army officer had been honoured for shooting down the aircraft.

The officer "has been awarded a third degree medal 'For Distinguished Military Service' for shooting down the enemy's Mi-24 helicopter, and for vigilance and heroism on combat duty", the Defence Ministry said.

'Unprecedented aggravation'

The attack drew threats of retaliation from Armenia.

"Consequences for this unprecedented aggravation of the situation will be very painful for the Azeri side," Artsrun Hovhannisyan, Armenian defence minister, said on his Facebook page.

Armenia said Azerbaijan will face "grave consequences".

"This is an unprecedented escalation and the consequences for Azerbaijan will be grave," Artsrun Hovannisyan, Armenia's Foreign Ministry spokesman, told AFP.

"Azerbaijan's claim that the Armenian helicopter attacked its positions is not true. Examination of the wreckage will prove that the helicopter carried no weapons."

The separatist Defence Ministry in Karabakh confirmed that its helicopter was downed by Azerbaijani forces "while conducting a training flight as part of military drills", adding that a firefight began after the incident and was continuing.

"The enemy is continuing to fire intensively in the direction of the site of the incident with small arms of various calibre," it said.

Since Thursday, Karabakh forces have been conducting joint drills with Armenia coordinated by the Armenian army chief of staff.

Festering conflict

Two decades after a ceasefire agreement ended their bitter war over Karabakh, Azerbaijani and Armenian forces regularly exchange fire across their frontier and along the Karabakh frontline.

Last month Europe made a fresh push to end the festering conflict.

Frank-Walter Steinmeier, Germany's foreign minister, visited both countries in October to facilitate a negotiated solution to the conflict.

French President Francois Hollande also hosted leaders from Armenia and Azerbaijan for Karabakh talks but the meeting ended without any breakthrough.

Tensions between Azerbaijan and Russia-allied Armenia are escalating as Russia confronts the West over Ukraine, where government forces are battling pro-Russian separatists.

"What happened in Ukraine has had a direct impact" on the Karabakh conflict, a source in Hollande's entourage said in October, adding that Russia's annexation of Crimea "exacerbated the climate".