Khan, a direct descendant of Mysore's 18th century ruler Tipu Sultan, was killed in 1944 after her spy network collapsed in France.
The bust was unveiled today at the Gordon Square Gardens here near the house where she lived as a child, by Queen Elizabeth II's daughter, Princess Anne, who praised her valour and supreme sacrifice.
It is said to be the first such memorial in Britain dedicated to a Muslim and the first in honour of an Asian woman.
Khan was posthumously awarded the George Cross for her work in France and for revealing nothing of use to her interrogators despite being tortured by the Gestapo for 10 months.
Noor's father Inayat Khan was the great grandson of Tipu Sultan, who had refused to submit to British rule and was killed in battle in 1799.
Khan was an operative of the British Special Operations Executive (SOE), who was sent to France to aid the French resistance to the Nazis. She was captured and killed by the Gestapo at the age of 30.
"Stories like these are very remarkable and it also reflects the multicultural and international aspect of our life. I hope it will remind people to ask questions who she was and why she she was here," said Princess Anne.
Khan was the last essential link with London after mass arrests by the Gestapo destroyed the Special Operations Executive spy network in Paris.
As her spy circuit collapsed, her commanders urged her to return, but she refused to abandon her French comrades without communication.
For three months, she single-handedly ran a cell of spies across Paris, frequently changing her appearance and name until she was eventually captured.
The event marks the end of several years of campaign by the Noor Inayat Khan Memorial Trust headed by her biographer Shrabani Basu, to revive the memory of the forgotten war heroine.
The campaign has received the support of British Prime Minister David Cameron and several MPs and Peers as well as from eminent women like film maker Gurinder Chadha, stage artist Nina Wadia and sitarist Anoushka Shankar.
"Noor Inayat Khan was the first woman who paid the supreme price for her heroism. She was a young Indian woman, she was proud of her Indian heritage and also proud of her British and French links," said Basu.
Noor's family members from France and the US were present at the unveiling of the bust, which Basu described as the highest tribute to her.
She said Noor not only represented the brave persons of SOE but millions of Indians who laid down their lives during the World War II.
A message from British Prime Minister Cameron said: "It is impossible not to be moved by Noor's bravery in the face of capture, interrogation, and harsh imprisonment, and by her cruel death met with indomitable courage. The award of George Cross, our highest civilian decoration gave recognition to her heroism".
Basu said became interested in Khan's story from "pure curiosity" about how an Indian woman could have been involved in the theatre of war in Europe.
"As I started researching her life, I realised she was a Sufi who believed in non-violence and religious harmony and had yet volunteered to be in the frontline," Basu, a journalist, said.
"Khan - code named Madeline and shot dead at Dachau concentration camp, was the proud descendant of a ruler who had died fighting the British, her own father was a strong nationalist, and Noor was a great admirer of Pandit Jawaharlal Nehru and Mahatma Gandhi.
"Though she believed firmly in Indian independence, she was focused and knew that it was important to fight the war against fascism".
The bust has been installed on land owned by the University of London, close to the Bloomsbury house where the spy princess lived as a child in 1914 and where she returned while training for the SOE during the World War II.
London: Britain on Thursday remembered the sacrifice of Noor Inayat Khan, unveiling a bronze bust of the Indian- origin 'spy princes', who worked in France during World War II before being tortured and shot by the German Nazis.
First Published: Thursday, November 08, 2012, 21:49