An unidentified buyer has paid 6.9 million dollars (6.5 million US dollars) for a Picasso at an Australian auction, manufacture it the most costly painting ever sold in the country.

The 1954 oil on canvas 'Sylvette' went under the sledge hammer for 5.75 million dollars on Wednesday night but the buyers' premium, which goes to the Deutscher-Menzies auction house, took the price paid to 6.9 million dollars.

"It's a historic day for Australia in the sense that a very considerable international picture by the greatest artist of the 20th Century was sold at an Australian auction for a record price," said Deutscher-Menzies owner Rod Menzies.

Menzies owned the painting, one of several Picasso painted of model and muse Sylvette David, having bought it at a New York auction two years ago for 4.6 million US dollars.

The buyer was a New York collector, described by Menzies as a friend and client, The Australian newspaper reported.

Menzies auctioned the painting locally because he "wants to show that Sydney is the New York of the art world in the southern hemisphere, and that we can sell to the international community," said spokeswoman Marie Geissler.

The sale of the brilliantly coloured work smashed the previous Australian record, held by Brett Whiteley's The Olgas For Ernest Giles, which went for 3.48 million dollars last year.