Auction house Sotheby's says other highlights include a peacock jumpsuit worn by Elvis Presley worth $200,000 to $300,000 and a John Lennon piano also played by Lou Reed.
Richard Austin, head of Tuesday's two-part sale at Sotheby's, said the auction celebrates various rock performers who have gripped the world for the past 60 years.
Dylan's original handwritten lyrics for the 1965 epic "Like A Rolling Stone," which transformed him from a folk musician into a rock icon, headline the auction, and are estimated to fetch $500,000.
Named by Rolling Stone Magazine as the greatest of 500 greatest songs of all time, Sotheby's says the lyrics transformed the course of pop music in the 20th century.
Austin told AFP it was the first time a six-minute single was released, allowing people to go beyond short format, and marked one of the first cases of viral marketing.
Executives opposed its release because of its length, but an employee took it to a nightclub where it played all night, leading to DJs to clamor Columbia records for its release.
Austin said there was "a lot of interest" in both sets of Dylan lyrics ahead of the auction, calling them a "wonderful thing just to see."
Dylan's final lyrics for the protest anthem "A Hard Rain's A-Gonna Fall" also go under the hammer, estimated to be worth $400,000-600,000 by Sotheby's.
A piano first played by Lennon when he was recording the album "Imagine" and later played in multiple studios by him, Dylan and Reed, among others, is valued at $100,000 to $200,000.
Among the other items are the infamous contract that Jimi Hendrix signed in 1965 agreeing to play exclusively for record label PPX for just $1, valued at $100,000 to $200,000.
The memorabilia has been compiled from private collectors over the years and some people who worked for the recording industry.