A woman claims she was "forced to have sexual relations with the prince" while underage.
Buckingham Palace has issued a strongly worded denial of allegations that Prince Andrew was involved in "impropriety with underage minors".
The statement was released after the Duke of York was named in a US lawsuit.
The woman who has made the allegations claims the disgraced US banker Jeffrey Epstein loaned her out to his friends, including Prince Andrew.
Papers filed by her lawyers say she was held as a "sex slave" by Epstein from 1999 through 2002 after he "became enamoured" with her.
In the motion filed in a court in Florida, she claims she was "forced to have sexual relations with this prince when she was a minor" in London, New York and on a private Caribbean island. She is believed to have been 17 at the time - underage according to US law.
The document continues: "Epstein instructed Jane Doe #3 that she was to give the Prince whatever he demanded and required Jane Doe #3 to report back to him on the details of the sexual abuse.”
The woman, who wishes to remain anonymous and is referred to as Jane Doe 3 in documents, says Epstein, who has been jailed for having sex with a 14-year-old, forced her to have sexual encounters against her will between 1999 and 2002.
In the papers, she claims she was effectively recruited for Epstein's use by Ghislaine Maxwell, the daughter of the late media tycoon Robert Maxwell, when she was 15 years old.
And it is claimed in the court document that Ms Maxwell "was one of the main women whom Epstein used to procure under-aged girls for sexual activities".
The document also claims Epstein's "purposes in 'lending' Jane Doe to such powerful people were to ingratiate himself with them for business, personal, political and financial gain, as well as to obtain potential blackmail information".
Buckingham Palace said: "This relates to long-standing and ongoing civil proceedings in the United States, to which the Duke of York is not a party. As such we would not comment in detail. However, for the avoidance of doubt, any suggestion of impropriety with underage minors is categorically untrue."
Prince Andrew's friendship with Epstein is well-documented and in an interview in 2011 he denied any sexual contact with any of the young women connected to the multi-millionaire banker.
Sky News Correspondent Rhiannon Mills said: "It's important to point out that we have in the past seen Prince Andrew criticised for spending time with Epstein, including in December 2010 after he was released from prison."
Epstein was jailed in 2008 and spent 13 months in jail after admitting to having sex with a 14-year-old.
He had been investigated for paying underage girls to have sex with him at his luxury Palm Beach home - and 40 women had come forward as victims.
However, he cut a deal with federal prosecutors and the charges were not progressed.
Two of his victims have now brought a case against the prosecutors claiming their rights were violated because they were not consulted on the secret deal.
Jane Doe 3 has applied to the court to be included in the lawsuit against the federal prosecutor and it is in the legal document to join the case that she makes the allegations against the Duke of York.
Sky News has attempted to reach Ms Maxwell for a response to the latest allegations.
When claims about the nature of her relationship with Epstein were reported in 2011, her lawyers issued a statement describing them as "entirely false".
Sky News
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