Eurasianet reports that coders from the Azeri Ministry of Communications have begun work on a web crawler and are also creating a browser.
Officials said the purpose was to boost national security and protect commercial considerations.
Critics are concerned however that the initiative is designed to provide easy censorship for the government and help President Ilham Aliyev, who has recently been criticized for his human rights record, to crack down on dissidents and activists.
Freedom House reports that journalists and activists have recently faced escalating harassment by the authorities. Since Azerbaijani media is dominated by state-owned news sources, many Azerbaijani activists now use social media forums such as Facebook to discuss their politics.
Abulfat Fatulayev, founder of state-run technology firm Dilmanc, told Trend news agency that the service would simply keep advertising revenues within the country rather than streaming out to international providers.
Azerbaijan and neighboring Armenia have until now relied mostly on Google and Russian search engine Yandex.
Iran launched a domestic web provider this year, Yooz, and Turkey has reportedly announced plans to follow suit.
The Internet was first introduced to Azerbaijan in 1994 and made available to the wider public in 1996.
