At 03.15 hours on 4 July 1942 the Carlton (Master Ragnvald Hansen) was en route in convoy PQ-17, when German He115 aircraft of the Küstenfliegergruppe 906 attacked convoy with torpedoes 200 miles northeast of Bear Island in 75°49N/22°15E. One aircraft dropped a torpedo about one-half mile away. It passed between the Carlton and the Samuel Chase but struck the Christopher Newport, which was later sunk by U-457 (Brandenburg). The convoy was scattered by convoy commodore on Admiralty orders in the evening of that day.

In the morning on 5 July, U-88 spotted the Carlton and pursued her for three hours before firing a torpedo, which struck the ship but did not detonate. At 10.15 hours a second torpedo struck the starboard side amidships, entering the tank containing 5000 barrels of Navy special fuel oil and ignited the cargo. The blast collapsed the forward fireroom bulkhead and the after bulkhead of the #2 hold. The two starboard lifeboats were also destroyed and the #3 hatch was blown away, dispersing the cargo of flour in this hold all over the deck. The burning Carlton sank on even keel by the bow within ten minutes. Two men died on watch in the engine room and the remaining men of the complement of eight officers, 26 crewmen and eleven armed guards (the ship was armed with one 4in, two .50cal and two .30cal guns) abandoned ship in one lifeboat and four rafts, which were later lashed together. Ten hours after the attack German seaplanes landed near the survivors and took 18 crew members and eight armed guards ashore. By 17 September, they had all been transferred to Milag Nord, a POW camp near Bremen. On 9 July, a British aircraft dropped food for the remaining 14 crew members and three armed guards. At 19.30 hours on 13 July, U-376 (Marks) offered the men medical assistance, which the men declined and gave them the position, a compass, charts, biscuits, water, blankets and cigarettes. 19 days after the attack they made landfall at Tufjord, Norway near the North Cape. Before landing, the first assistant engineer died of exposure. The 16 survivors were captured by the Germans and arrived at Milag Nord on 27 August.

The survivors of the Carlton provided valuable information to the Germans regarding convoy and the cargos carried by the ships. This proved to be quite a propaganda coup for Germany. 27 crew members were later repatriated, arriving in New York aboard the Swedish motor passenger ship Gripsholm on 21 Feb 1945. The others remained at Milag Nord until after hostilities ceased.