The so-called 'Fairytale' dress was designed by one of Diana's favourite designers, the Emanuels, in 1986.
"It's a very flamboyant, very showy dress.....but it is also I think the kind of dress a little girl, if she was thinking about what a princess would wear and she was to sit down and draw it, it would look like this dress. It is very fairytale, very dreamy, very sweet," said Kerry Taylor, owner of the auction house.
The dress is white organza and satin and has shimmering gold panels, jewel-like rhinestones and pearl adornments.
It was a favourite of Diana's and she wore it several times, including to the Royal Opera House for a performance by the Bolshoi Ballet and to the Leicester Square premiere of the James Bond film 'The Living Daylights'.
"It's also quite ingenue, quite little-girlish, it is very pretty, the big skirt, the corseted bodice and in a way it is in the great tradition of royal dresses, where you expect to see a member of the royal family, you know, you see them in ancient portraits of Elizabeth I dripping in jewels with a big beaded bodice. This is a 1980's version of the same thing," she said.
The most expensive Diana dress ever sold at auction was her couture velvet 'Travolta' gown, worn when she famously danced with actor John Travolta at the White House. That fetched £240,000 at a recent auction.
Presented by Adam Justice