"Tres personajes" ("Three People"), a 1970 work by Rufino Tamayo, one of Mexico's best known artists, was bagged for 1.049,000 dollars by a north American buyer who fought off a telephone bidder, the auction house said.
It had been saved from the garbage by Elizabeth Gibson, who spotted the work while out walking one morning in 2003. She found the painting, measuring 98 by 130 centimeters, in perfect condition.
"It was a Saturday morning. I went out for a coffee at 7:00 am. I saw it on the sidewalk among black plastic garbage bags," she told AFP ahead of the sale.
"I passed my way and had my coffee, but a voice inside kept telling me to go back and take the painting. So I stopped reading my book and I went back and took the painting, which had a very bad frame but was in perfect condition."
The work, with bold strokes of red, purple and yellow, was bought for 55,000 dollars in 1977 by a Texas man for his wife's birthday. The couple put it in storage while they moved house and noticed the painting was missing in 1987 when picking up their belongings at the warehouse.
Where the painting went for the next 16 years remains a mystery, but for several months after discovering it, Gibson kept it on the wall in her apartment.
Tipped off by a friend that the painting could be valuable, Gibson started investigating only to find on the Internet that the work had been featured on US television show "The Antiques Roadshow" in a segment on missing paintings.
Gibson approached Sotheby's, which helped return the painting to its original owner, who remains unidentified.
Federal FBI detectives are still investigating the case.
The painting carried a pre-sale estimate of 750,000 to one million dollars. Gibson has already received a 15,000-dollar reward for helping secure its return and was to receive an undisclosed sum from the sale.
Marysol Nieves of Sotheby's Latin American art department said the piece was a classic example of all the important elements of the artist's work.
The auctioneer sold four other major pictures on Tuesday. Among them, "Dejeuner sur l'herbe" ("Lunch on the Grass") by the Colombian painter Fernando Botero fetched 1.3 million dollars.
The sale came amid a week of Latin American art auctions in New York expected to fetch around 50 million dollars and as the city's first contemporary Latin American art fair wrapped up after selling some 300 works.
The city's Museum of Modern Art is also due this week to unveil an exhibition of its most recent Latin American acquisitions. (AFP)