Banksy himself posted an Instagram picture of shocked attendees watching the painting disintegrate, with the caption: "Going, going, gone..."
Sotheby's said this was "certainly" the first time a work of art started to shred itself after coming under the hammer.
Video footage showed two men taking the painting away shortly after the sale, bits of the image hanging down from the bottom of the frame in strips.
The auction house was not immediately available for comment on the whereabouts of the painting's remains, or how its value might have changed in light of its self-destruction.
Banksy, whose real identity is unknown, is known for sharply ironic outdoor graffiti with political themes, including at Israel's barrier at the West Bank and Disneyland where he painted a life-size figure of a Guantanamo Bay detainee.
Once a small-time graffiti artist from the English city of Bristol, Banksy's work has become hugely valuable.
