Police challenged Prince Andrew in the gardens at Buckingham Palace and ordered him to 'verify his identity' after mistaking him for an intruder.
The Duke of York, 53, had gone for a walk in the gardens to enjoy the early evening sunshine when he was stopped by two police officers.
A Royal insider alleged the officers pointed their guns at the Prince and told him to 'put your hands up and get on the ground' before realising who he was.
Metropolitan Police insists 'no weapons were drawn and no force was used' during the incident.
The incident at around 6pm on Wednesday came less than 48 hours after a break-in at the Queen's home.
A spokesman for the Metropolitan Police said: 'On Wednesday, September 4, 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.'A Royal insider told the Sunday Express: '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.'
It comes after an intruder was able to scale a fence and get inside the palace on Monday night, before being arrested by police.
A security review has been launched following Monday night's suspected burglary.
Police said the man was found shortly before 10.30pm 'in an area currently open to the public during the day' and arrested for burglary, trespass and criminal damage.
Prince Andrew, pictured with his ex-wife Sarah Ferguson, is said to be very unhappy about the incident
A second man was arrested outside the palace for conspiracy to commit burglary.
A spokesman for the Metropolitan Police said: 'Both men have been bailed to return to a central London police station and enquiries continue.
'A review of the specific circumstances of this incident is being carried out. No members of the Royal family were at Buckingham Palace at the time of the incident.'
A spokesman added that security would form part of the review.
The Queen made her traditional appearance at a Highland Games yesterday, as details of the break-in emerged.
She was joined by the Duke of Edinburgh and the Prince of Wales at the Braemar Gathering in Aberdeenshire, where the royal party watched pipe bands and dancers perform to a large crowd.
The Queen has been spending her summer break at Balmoral Castle since the beginning of August and is not expected to return to the palace until October.
The Braemar Gathering is held each year just a short distance from the Balmoral estate in Aberdeenshire.
The break-in is one of the most serious security breaches at the palace since 1982, when Michael Fagan evaded guards to get inside the Queen's private chambers while she was still in bed.
The unemployed father of four, 31, spent around 10 minutes talking to the Queen after he climbed over the palace walls and up a drainpipe.
The Queen managed to raise the alarm when Fagan asked for a cigarette, allowing her to call for a footman who held him until police arrived.