At 20.33 hours on 2 December 1941 the unescorted Fjord (Master Halfdan Tønder) was hit on starboard side in the boiler room by one of two G7e torpedoes fired by U-557 while steaming at 8 knots in fine weather off Estepona Point, Spain. Earlier that day the U-boat had observed the harbor of Malaga and was on its way back there, after chasing a ship towards Gibraltar in vain, when it spotted and identified the Norwegian ship at 18.25 hours. She sank so quickly that the crew had no time to launch the lifeboats and were forced to jump overboard, clinging to wreckage and swimming to two rafts that floated free. The master and 13 crew members were lost. One raft with 11 survivors and another with 9 managed to reach the nearby coast about 9 kilometers southwest of Estepona. They were first taken to Algeciras and questioned by Spanish naval officers, but then transported to Seville as they were not yet allowed to leave Spain. However, after none of the Norwegians took the offer to return to Norway, all survivors eventually left to Gibraltar.

The Allied consulates got busy investigating the case, as it was obvious that the U-boat attack took place well within the neutral Spanish territorial waters.