Chief Joseph of the Nez Perce tribe. Photograph: Bettmann/Corbis

A war shirt worn by Chief Joseph of the Nez Perce tribe that can be seen in a painting hanging in the Smithsonian Institution sold on Saturday for $877,500 (£562,000) at auction, organisers said.

Mike Overby, an organiser of the annual Coeur d'Alene Art Auction, said the shirt that sold in Reno is considered to be one of the most important Native American artifacts ever to come to auction. It had been expected to raise from $800,000 to $1.2m, he said.

"Anything associated with Chief Joseph is highly desirable, and that's a pretty special shirt," he told Associated Press.

Chief Joseph wore the shirt in 1877 in the earliest known photo of him, and again while posing for a portrait by Cyrenius Hall in 1878. That painting, which was used for a US postage stamp, now hangs in the Smithsonian.

The poncho-style war shirt was made of two soft skins, probably deerskin. It features beadwork with bold geometric designs and bright colors. Warriors kept such prestigious garments clean in a saddlebag on their horse or carefully stored while in camp, to be worn only on special occasions.

The shirt surfaced at an Indian relic show in the 1990s and was sold without any knowledge of its link to the photo and portrait. It changed hands again before the connection was discovered.

Its quality makes it desirable for collectors, but it is the "surprising discovery of the shirt's role in history that reveals its true importance", said Brasser, a former curator of the National Museum of Ethnology in Leiden, Netherlands, and at the Canadian Museum of Civilisation in Ottawa.

The photo and portrait showing the war shirt were made shortly after Chief Joseph led 750 Nez Perce tribal members on an epic 1,700-mile journey from Oregon to Montana in an unsuccessful bid to reach Canada and avoid being confined to a reservation. They were forced to surrender in 1877 after US troops stopped them about 40 miles south of the Canadian border.

"It was a wild-card piece. We're real happy where it ended up," Overby said. The sale involved private collectors.

Despite its price, the shirt was not the top-selling piece at the auction. The painting Scout's Report, by Howard Terpning, fetched $994,500, and Cowboys Roping the Bear by Frank Tenny Johnson was bought for $965,250.

Some 400 bidders took part in what was billed as the world's largest Western art sale. About 300 works were sold for a total of $17.2m, up from $16.9m last year.