Bidders looked shocked as the piece was torn to shred by a shredder built into the gold frame.
If a work is damaged while in the care of an auction house, a buyer would not normally be expected to go through with the purchase. Reports the Art Newspaper, "a man dressed in black sporting sunglasses and a hat was seen scuffling with security guards near the entrance to Sotheby's shortly after the incident".
When the auctioneer selling one of Banksy's most famous works announced that it was going, going, gone, they did not realise it would be quite so literal. "We are busily figuring out what this means in an auction context", he said.
"This is now part of Art History in its shredded state and we'd estimate Banksy has added at a minimum 50% to it's value, possibly as high as being worth £2m+".
Sotheby's today confirmed there had been a legitimate winning bid on the artwork.
Banksy's real identity is unknown, though most accounts say he comes from Bristol where he started out as a small-time graffiti artist.
His "Happy Choppers" from 2006 fetched $735,000 also on Friday at a NY auction of personal effects owned by the late actor Robin Williams and his wife.
The painting was auctioned off Friday night at Sotheby's in London.
Just after the painting was sold, the piece "self-destructed" and was shredded through what is thought to have been a remotely activated mechanism in the frame.
It was instantly recognisable as a Banksy to anyone familiar with his work.
Art prankster Banksy has struck again.