A fresh air raid began before 4 pm. She was bombed at 15:48 by Junkers 88 aircraft from II. Gruppe/Kampfgeschwader 30. Three direct hits caused the ship to list first to starboard then to port and she rolled over and sank within twenty minutes. Over 1,400 tons of fuel oil leaked into the sea and was set partially ablaze, possibly by strafing. Many drowned, were choked by the oil, or were shot by the strafing German aircraft. Survivors were taken aboard other evacuation vessels, the trawler Cambridgeshire rescuing 900. There were 2,477 survivors. The death toll accounted for roughly a third of the total losses of the British Expeditionary Force in France. She sank around 5 nm (9 km) south of Chémoulin Point in the Charpentier roads, around 9 nm (17 km) out of St. Nazaire. The Lancastria Association Victim registers 1,738 deaths.
The immense loss of life was such that the British government banned any public announcements of the disaster through the D-Notice system, but the story was broken by the New York Times and The Scotsman newspapers on 26 July. The British press did then cover the story, including front pages of the Daily Herald (also on 26 July) and Sunday Express on 4 August; the latter included a photograph of the capsized ship with its upturned hull lined with men under the headline "Last Moments of the Greatest Sea Tragedy of All Time". Due to the imposition of the D-Notice, survivors and the crews of the ships that had gone to the aid of Lancastria did not discuss the disaster at the time due to the fear of court martial. The British Government has refused to make the site a war grave under the Protection of Military Remains Act 1986 although documents obtained under the Freedom of Information show that it could be done. The French Government recently placed an exclusion zone around the wreck site. In July 2007 another request for documents held by the Ministry of Defence related to the sinking was rejected by the British Government.