The jacket can be seen on the cover of the ground-breaking record, which has become one of the most famous album sleeves of all time. It was taken in the basement of the Los Angeles YMCA by Reid Miles, who produced hundreds of album covers in his career, mainly for jazz musicians.
The cover shows Bob Dylan and The Band surrounded by an array of bizarre figures including Canadian rocker Neil Young. Each of the characters featured is representative of a song on the album, with the photograph reminiscent of a surrealist painting.
Dylan sits amidst the crowd, wearing the jacket and holding a mandolin.
The unique jacket, made from a Cheumash Indian blanket, comes complete with a letter of provenance from the undisclosed friend, in which she describes her relationship with the songwriter.
In one notable section of the letter, she states: "We went to the renaissance faire together with a small group dressed as monks so no one would know he was there. We went to his house as you could jump from the roof and hang glide down towards the ocean."
The jacket provides an excellent opportunity for Bob Dylan collectors to own a truly unique piece of the singer's history at great value. One expert has estimated the jacket to see bids in the region of $15,000-25,000 (£9,275-15,458), while PFC Auctions has set a minimum bid of £2,000.
The item will be joined in the auction by a Bob Dylan signed guitar strap, which is currently selling at £1,210.
You can find PFC Auctions' Bob Dylan jacket here.