The handmade pen which is expected to fetch between 5,000 pounds and 7,000 pounds remained with Mountbatten's family until recently when it was bought by an unknown collector in Yorkshire, the 'Daily Mail' reported.
"The Maharaja of Jodhpur built it for his friend in case he got himself in a position where he had to sign something which he did not wish to sign - either to kill himself or the enemy," Nicholas Holt, founder of Holt's Auctioneers which is selling the item, said.
The weapon was this week on display at Holt's Auctioneers gun valuation day at Orvis, in West Park, Harrogate, North Yorkshire.
Holt said the deadly pen pistol would have been specially built for Mountbatten.
The pen, also referred to as a pencil pistol, was built in 1948 and features a 2 3/4in smooth-bore barrel containing a removable propelling pencil mechanism with a concealed trigger.
The outer body is inscribed with the words 'Gun Shop Jodphur, 1948'.
The gun will be sold by Norfolk-based Holt's Auctioneers to be included in the sale of Fine Modern and Antique Guns at Princess Louise House, London, on March 21.
Holt said any sale would be subject to strict laws governing the sale of arms and said he hoped that a museum might be interested in buying the item.
When the item was last up for sale it was one of a number of military items that belonged to Lord Mountbatten, some of which he used during World War II. They reputedly helped to preserve his life.
The collection had been at the Imperial War Museum after legislation following the Dunblane massacre in 1996 banned the ownership of handguns.
But Mountbatten's family later decided to sell the items.
"It really is a fascinating little thing. This item I believe was a part of the mystique which went through that community which led to stories like the Bond stories," James Doyle, store manager at The Orvis Harrogate Store, said.
Mountbatten was a British statesman and naval officer, an uncle of the Duke of Edinburgh, and the last Viceroy of India.
He was killed by a bomb blast on his boat off the coast of Ireland at the age of 79.
