The lavishly embroidered pink silk evening gown and bolero, designed by Catherine Walker especially for the state visit to India in February 1992, is set to fetch between 80,000-120,000 pounds.
"It is one of the most lavish of all her gowns. Richly embroidered royal dresses have been a tradition for royalty and aristocracy since Elizabethan times," a spokesperson for Kerry Taylor Auctions told PTI.
It was during this particular trip that Princess Diana was famously photographed sitting alone at the Taj Mahal, which led to a flurry of speculation in the press at the time.
According to the lot description, the inspiration for the embroidered design came from the lid of an Indian inlaid marquetry box discovered by the designers in a London market.
Great care was taken when choosing the colours of the needlework as it needed to be colourful and exuberant to reflect the country of her visit.
The other nine lots at the auction includes another iconic gown worn by the princess while dancing with actor John Travolta during a state dinner at the White House in 1985.
The Victor Edelstein midnight blue velvet outfit is the highlight of the sale and set to fetch up to 300,000 pounds. "Diana was photographed wearing these gowns by not only by the paparazzi, but by some of the leading photographers of the day - including Mario Testino and Lord Snowdon," said the auction house, which specialises in vintage fashion sales.
It is confident that the latest auction will prove hugely popular as the lots include some of the "most important and iconic" dresses worn by Diana, who died in a car crash in Paris in 1997.
At Diana's request, the 10 dresses were originally sold in a charity auction in New York in June 1997, just two months before she died.
Florida-based businesswoman Maureen Dunkel bought the dresses but was forced to put them up for auction in 2011 after she went bankrupt - but only four of them sold.
"That sale was a bit of a disaster... The reserve prices were ridiculously high. But they are beautiful dresses. We have a good reputation for selling these things and the estimates are sensible, rooted in reality and obtainable," the spokesperson added.
The princess is a well-known fashion icon and her style was minutely scrutinised, discussed and imitated around the world.
The latest sale of her collection, which includes the handiwork of her favourite designers like Zandra Rhodes and Bruce Oldfield, is expected to raise a whopping 800,000 pounds.
Black was her favourite colour and Diana often chose to wear it, despite the fact that Prince Charles had advised her that it was strictly against royal protocol - as members of the royal family are only supposed to wear it for periods of mourning.