At 08.20 hours on 19 June 1942, U-701 began to shell USS YP-389 (Lt R.J. Philips, USN) without warning in a dark night without moon near the Diamond Shoals Lightship Buoy about 20 miles south-southeast of Cape Hatteras, North Carolina. The armed trawler was steaming on a non-evasive southwest course at 6 knots, while on patrol duty assigned to the task of warning Allied and neutral shipping against entering the defensive minefields in the area. The Germans opened fire with the anti-aircraft guns from the starboard quarter and then rapidly fired all rounds for the deck gun stored in the ready-use lockers to silence the guns of the patrol vessel and thus using an unorthodox mixture of armor piercing, high explosive and incendiary shells. USS YP-389 tried to avoid the shelling by maneuvering in such manner as to present as small a target as possible, but could only return fire with both machine guns as the main gun was out of order due to a faulty firing spring. However, this proved to be ineffectual and seemed to help the enemy to aim so the commander gave the orders to cease fire after each machine gun fired 12 drums. A distress signal was sent via radio telephone and four depth charges were dropped to discourage the U-boat to chase the trawler, of which one was a dud. The shelling started a fire forward which was quickly extinguished, but another hit disabled the carbon dioxide extinguishing system and flooded the engine room with fumes, then the fuel tanks were hit and soon the wheelhouse and charthouse were on fire. At least four crew members had been killed and many others wounded by shellfire when the commander eventually ordered the ship abandoned at 09.30 hours. As the life rafts were blown away and the lifeboats too exposed to be launched all survivors either dived or were assisted over the side, leaving USS YP-389 under full headway to disguise that she was abandoned. The ruse was successful as U-701, which had fired not less than 50 rounds from the deck gun with very few misses, kept following the trawler and fired approximately a dozen more rounds into the burning vessel until it sank by the stern at 10.15 hours. The U-boat then apparently searched for the survivors but found none and left the area.

Five crew members had been lost in the sinking and a sixth mortally wounded man died in the water while waiting for rescue. His body and the survivors were picked up by USCGC CG-462 and USCGC CG-486 at about 13.30 hours and brought to Ocracoke Coast Guard Station. Eight injured survivors and the body were transshipped to Morehead City Section Base, while four seriously injured men were flown to the Norfolk Naval Hospital by a Hall flying boat. The investigation of the loss of USS YP-389 showed that the vessel was extremely ill-suited for the assigned task as she could barely reach 9 knots, lacked adequate defensive and offensive armament and was not equipped with a listening device. Furthermore she was sent on patrol duty with a defective main gun because no replacement parts had been available at the Morehead City Section Base.