The term WHERE THE BLUE GROTTO IS can be answered with the word CAPRI. Capri is an island located in the Tyrrhenian Sea off the Sorrentine Peninsula, on the south side of the Gulf of Naples in the Campania region of Italy. The Blue Grotto is a famous sea cave located on the island of Capri. It is a popular tourist destination and is known for its brilliant blue light that reflects off the water.