The princess wore the dress, made by couturier Victor Edelstein, at an event at the White House in November 1985.
Photographs of the princess and the Hollywood star gliding around the room to the music of “Saturday Night Fever” were seen around the world, and Travolta later described the experience as having been “like a fairy tale.”
Historic Royal Palaces (HRP), an independent charity that looks after palaces in the UK, paid a princely sum for the dress on Tuesday – the day after the dress failed to sell at auction.
“We’re delighted to have acquired this iconic evening gown for the Royal Ceremonial Dress Collection – a designated collection of national and international importance – over twenty years since it first left Kensington Palace,” said Eleri Lynn, curator at HRP, in a statement.
“Not only is the ‘Travolta’ dress a fantastic example of couture tailoring designed to dazzle on a state occasion, it represents a key moment in the story of twentieth century royal fashion.”
The dress had been expected to fetch up to £350,000 (about $388,000) at Kerry Taylor Auctions on Monday.
HRP purchased the gown outside of the auction, according to a spokesman.
A spokeswoman for Kerry Taylor Auctions told CNN that they wouldn’t comment on why the dress didn’t sell at auction, but the seller is happy that the dress will remain in the UK.
The auction house last sold at the same auction house for £240,000 ($311,000) in March 2013, to a British buyer who bought the dress as a gift for his wife.
Diana wore the dress with a sapphire and pearl choker, an outfit that has since become emblematic of the princess. Lynn said Diana had become a fashion icon like Jackie Kennedy or Audrey Hepburn, calling the princess “timeless, elegant and still so relevant.”
Not only did Diana’s sartorial choices inform fashion trends when she was alive, her looks periodically appear on the catwalk to this day. She promoted British fashion as part of her royal duties, and used her clothes for her own purposes, said Lynn.
“In the new media age she was active in the creation of her own image, and she used fashion to do this,” added Lynn.
“She chose her clothing carefully, almost as a tool, to help her in her job as patron of the arts, diplomat, and humanitarian.”