At 02.03 hours on 27 Jan 1942, U-123 opened fire with the deck gun from a distance of 2500 metres at the Pan Norway (Master Johan A. Bach), dispersed from convoy ON-56 on 16 January, because no torpedoes were left. After the third salvo hits were scored in the engine room and the funnel, setting the stern on fire. Even though the gun on the stern of the tanker was put out of action, the machine guns mounted on the bridge returned fire, hitting the conning tower and the deck several times. The U-boat then fired at the bridge, which also caught fire after some hits. As the tanker stopped and the crew began to abandon ship, the fire was ceased. In between Hardegen had to clip the splitten upper lip of MaschOGfr Bastl, who had been hit in the face by an empty cartridge that fell through the open hatch and lost several teeth.

After the crew had left the Pan Norway, the fire was re-opened but soon no ammunition for the deck gun was left so they shot holes into the waterline with the 37mm AA gun until the tanker capsized to port and sank by the stern after breaking in two northeast of the Bermudas at 03.45 hours. Only the fore part was still drifting bottom up and sank 13 minutes later after being holed with the last 37mm ammunition. Shortly before the duel began, the lookouts had spotted lights and the U-boat now went to investigate them. The lights belonged to the Greek steam merchant Mount Aetna (Master Stavros Sotirchos), which was neutral because she operated in Swiss charter. Hardegen stopped her and directed the ship to the lifeboats of Pan Norway. While the 29 occupants were picked up, the U-boat investigated the sinking position, rescued a wounded man drifting in the water, took care of him and after a short interrogation transferred him to the neutral vessel, which was informed where more survivors could be found. The master expressed his thanks and wished the U-boat a lucky return journey. The Mount Aetna picked up another 11 survivors from a raft and eventually landed the survivors (five of them wounded by shrapnel) at Lisbon on 6 February.