The 19-year-old Lady Diana Spencer bought the strapless dress, by designers Elizabeth and David Emanuel, who also created her wedding gown, for just 517.50 pounds in 1981 to wear on her first official appearance with her fiance, the Prince of Wales.
The dress was expected to fetch between 30,000 and 50,000 pounds at auction on Tuesday, but was snapped up by a fashion museum in Chile for almost four times that amount.
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Diana created a sensation when she stepped out in the low-cut gown, with one headline the following day reading: Daring Di sets fashion as she takes the plunge'.
It was deemed an unusual choice as the royal family only wear black for mourning. But the public loved it.
"It was a controversial dress because it was so low," auctioneer Kerry Taylor told the Daily Mirror.
"The public hadn't seen a potential royal who was young and sexy for a long time.
"Diana said she didn't realise the press would make such a fuss, but boy, did they and they continued to do so."
The gown was thought to be lost or destroyed.
In the weeks before her wedding Diana lost so much weight she returned the dress to be taken in.
However, the alterations were so drastic they made another, smaller version instead.
The Emanuels kept the original and forgot about it, re-discovering it only recently.
The dress was sold with an original copy of the invoice, fashion sketches, photographs of Diana wearing it, and a letter of authenticity to the Fundacion Museo De La Moda in Chile.
It was one of 30 lots sold by Elizabeth and David Emanuel.
The collection, which included actual clothes worn by the princess, fashion sketches, invoices, letters and related items, fetched a total of 282,720 pounds.
