'Girl with Balloon' was the final item in an auction at Sotheby's in London and its sale price equaled the artist’s previous auction record of £1.04 million, theguardian.com reported.
Shortly after the hammer came down on the item, however, the canvas began to pass through a shredder installed in the frame.
Banksy posted an image on Instagram of the shredded work dangling from the bottom of the frame with the title 'Going, going, gone …'.
"It appears we just got Banksy-ed," said Alex Branczik, Sotheby's senior director and head of contemporary art in Europe.
Sotheby's said in a statement to the Financial Times: "We have talked with the successful purchaser who was surprised by the story. We are in discussion about next steps."
The auction house declined to reveal the identity of the buyer.
It is unclear whether the prank will have destroyed or enhanced the value of the work.
The website MyArtBroker.com, which resells Banksy pieces, said 'Girl with Balloon' had enjoyed annual increases in value of about 20 percent in recent years.
"Prices now are regularly exceeding £115,000 for signed authenticated prints," said its co-founder Joey Syer.
"The auction result will only propel this further and given the media attention this stunt has received, the lucky buyer would see a great return on the £1.02 million they paid last night.
"This is now part of art history in its shredded state and we'd estimate Banksy has added at a minimum 50 percent to its value, possibly as high as being worth £2 million plus."
'Girl with Balloon', which was last year voted the UK's best-loved work of art, first appeared on a wall in Great Eastern Street in Shoreditch, east London. The 2006 gallery version featured spray paint and acrylic on canvas, mounted on a board.
The true identity of the Bristol-born artist has never been officially revealed despite wide speculation.
He rose to fame with graffiti that appeared on buildings across the UK, often marked by deeply satirical undertones.
Two new artworks appeared at the Barbican Center in central London in September 2017 inspired by an upcoming Jean-Michel Basquiat exhibition.
One of Banksy's more elaborate jokes came just over three years ago when he opened Dismaland, a "family theme park unsuitable for small children", on the seafront at Weston-super-Mare.
The Guardian described it at the time as "sometimes hilarious, sometimes eye-opening and occasionally breathtakingly shocking".