Can foreclosure stop an real estate transaction in progress?

I was buying a house in California. It was a short sale transaction. We open an escrow and I got my loan approved. My agent told me that the bank had also agreed to the purchase price, which meant to me that the short sale thing was taken care of. Just when I thought we were about to close the deal, my agent called and told me that the bank had just foreclosed the property and wanted to auction off the property at a lower price. My agent said the deal is totally off. Could the bank do that in the middle of an escrow? Is there anything I can do? Please advice.
Steve