Klan robes fetched $1,425 (£800) and a KKK knife made $400 on Saturday in Howell, 55 miles west of Detroit and one of Michigan's least diverse towns with 29 African Americans out of 9,000 people.
While some demonstrated holding signs reading "Hate has no home here," one man was seen wearing a KKK pin and another sporting an armband with a Nazi swastika.
"Maybe I have taught more people about history, at least this week, than some schools," auctioneer Gary Gray told AP. "It's not a question of racism. That's intertwined. But it's not the main focus."
One of the robes was bought for $700 by the Jim Crow Museum of Racist Memorabilia at Ferris State University in Big Rapids, Michigan. Museum officials hope to use it to teach tolerance. The items sold raised at least $24,000.
"I felt like I was at a Klan rally at some times," said David Pilgrim, the curator of the Jim Crow museum.
One protester, Michelle Soli, said: "People say it's historical, but it shouldn't be something we have to remember every day."
Civil rights groups criticised the auction as insensitive. Members of a local diversity council were raising money to buy one of the robes for an anti-racism museum exhibit.
Jerry Gowlan, who attended the auction, said he planned to bid on KKK literature and pamphlets, but said he wasn't a supporter of the Klan.
"If we as a society don't learn from past mistakes, we repeat them," Mr Gowlan said.
Community and business groups said the auction would do nothing to mend the town's racist reputation, which they trace to one man - Robert Miles, the Klan's grand dragon who lived on a farm outside Howell until his death in 1992.
Outside the auction, Howell's mayor, Geraldine Moen, joined the protesters.
She said the auction reignited stereotypes about the community.
"Hate and its symbols do not belong in Howell," she said.