In 1664 it was selected for the wedding dowry of a Spanish princess famously painted by Velazquez.
On Wednesday the Wittelsbach diamond became the most expensive stone or piece of jewellery to be sold at auction.
The sky-blue gem with centuries of royal connections was bought by Bond Street jeweller Laurence Graff, 69, for £16.4million at Christie's in Central London.
He said: 'If there had been no credit crunch, this diamond might have sold for £50million - I think we've got the bargain of the century.'
The jewel, originally from India, has changed owners only a handful of times and had not been put on the international market for 80 years.
Mr Graff said he plans to reshape the 35.56 carat gem - one of the largest cut diamonds in the world - before setting it in a piece of jewellery and selling it.
Mr Graff described the stone as 'the climax of my career' and hoped to 'make it flawless'.
Experts at the auction house were expecting the diamond to sell for £9million, but when it became clear two buyers were desperate to have it, the price escalated rapidly.
Bidding had begun at £4m, and climbed within seconds to £10m as Mr Graff's bid encountered competition from a Russian rival, New York-based Aleks Paul of Essex Global Trading.
At the back of the packed auction house room stood a pair of Russian men, who quietly had discussions with each other before the shorter of the pair, a portly man in a leather jacket, would increase his bid by £500,000 a time with subtle nod of the head.
Mr Graff - whose flagship store is in London's Bond Street, and who is said to be the biggest jeweller in the world - made bids over the telephone via Christie's jewellery director Raymond Sancroft-Baker.
The rate of bidding slowed as the price offered by the Russians reached £14m.
Mr Graff attempted to make a bid of £14.1m - but auctioneer Francois Curiel refused to accept an increase of a mere £100,000, insisting the jeweller increase his bid to £14.2m.
Again the Russians, understood to be representatives of a consortium of jewel dealers, raised him, to £14.4m until finally Mr Graff made a bid of £14.6m.
At this point, after long consideration, the portly Russian finally threw in the towel with a wave of his right hand.
When Mr Curiel asked 'Absolutely sure?', to chuckles from the crowded room, the Russian smiled his agreement - and the jewel was Mr Graff's.
With the buyer's premium added to all auction sales, the purchase price for the diamond was £16.393m.
Delighted Mr Graff said later: 'My business is to buy the very best - and this is the climax of my career.
'It's got small chips on it and needs polishing, so next week I'm going to send it to my most senior polisher, a South African in New York, and polish it, reshape it, and use all of my expertise to get the best out of it.
'The grey in it will go, and I'm hoping to make it flawless. It will be worth a lot more money when I'm finished with it, probably sometime next year.
'Two weeks ago I bought a 478 carat white uncut diamond from Lesotho, for £12m, and that is magnificent.
'But the Indian mine the Wittelsbach diamond came from has been extinct for more than a century, and to find any more this sky blue colour is impossible. It's one of the greatest treasures known to man, a freak of nature.'
The Christie's man who had delivered the telephone bids for Mr Graff, Mr Sancroft-Baker, said: 'The two Russian underbidders clearly realised it was a world class stone - and the price is a world record for any jewel or diamond.
'Most of the world famous diamonds are in museums, and very few like this ever come on to the market. The lady who has just sold the Wittelsbach diamond, who wants to remain anonymous, had owned it since 1964.
'In the present economic climate ordinary pieces are harder to sell. But super things like this can still get a world record price.'
The jewel was first noted as part of the dowry of Infanta Margarita Teresa (1651-1673) on her engagement to Leopold I of Austria.
In 1722 the diamond entered the Wittelsbach family, a European royal dynasty.