Armed police have challenged Prince Andrew, pointing guns at the Queen's son and ordering him to "put your hands up and get on the ground".
The 53-year-old prince, fifth in line to the throne, may have been mistaken by police for an intruder in the Buckingham Palace gardens.
A spokesman for the Metropolitan Police said: "On Wednesday, 4 September, at approximately 6pm two uniformed officers approached a man in the gardens of Buckingham Palace to verify his identity.
"The man was satisfactorily identified. No weapons were drawn and no force was used."
Prince Andrew was reported to be "absolutely livid" about the incident.
The Duke of York had been at an event in London, Piccadilly, to support new business ventures.
Royal protection officers were said be "jittery" after a genuine intruder breached security and was found in the Palace's state rooms two days earlier. A suspected accomplice was also arrested in a street outside the Palace.
Speaking to the Sunday Express, a royal insider said: "Everyone is talking about these two incidents and can't quite believe what has happened.
"The fact that this guy was able to wander off unchallenged and not be spotted by anyone is bad enough. But then to mistake the Duke for another intruder is almost incomprehensible.
"There is a high turnover of the police on duty at the Palace, but you'd think anyone would know what Prince Andrew looks like.
"It's fair to say that to describe the Duke as unhappy and the two officers as highly embarrassed is the biggest understatement of the century."
The insider continued: "He just went out into the gardens for a walk, to relax and enjoy the sunshine.
"It was only in the early evening and so was light.
"When he got to a far corner away from the Palace, he was suddenly pounced upon by an officer, and another was not far behind.
"They shouted all the usual, put your hands up and get on the ground, and both pointed their guns straight at him.
"He might have served in the Falklands war but I don't care who you are, it must have been terrifying."
They added: "What no one can understand is why they didn't recognise him...
"Clearly everyone was a bit jittery and nervous because of the intruder the day before, and these guys over-reacted.
"The general feeling is that the police are desperate to hush the whole thing up. It's not been a good week for them."