The incident occurred during the singer's first "Late Show" appearance Monday night.
Letterman kicked off the interview by asking the recording artist about the huge egg she arrives in before performances and awards shows.
"First of all, tell me about the egg," Letterman said, prompting Lady Gaga to counter, "What would you like to know about the vessel?"
"How much time do you spend in it? Oh, is it tough to get insurance?" Letterman wondered.
"Well, no, because for me, it's a place where I can meditate and experience rebirth," Gaga said, "so I just get inside of it and close it and then when I feel that I have been reborn spiritually, I just, whoo, come out."
Letterman questioned Gaga about a story going around that she "once ate [a] Barbie doll's head during a concert."
The singer replied, "Yes, all the time," to which Letterman expressed disbelief because, "That'd poison you, that's polypropylene."
Gaga said she was tired of all the stories about her, then took Letterman's notes sheet and ripped it in two. She and the audience laughed when Letterman said, "Once on a talk show, tore up host's notes."
She went on to pop a piece of the torn paper in her mouth and chew it.
Letterman tried to get her to take it out by joking: "It's chemically treated. You'll be sick for weeks. You won't be out of the egg for a month."
Gaga eventually spat the wad of paper out behind her guest chair.
Her newest album, "Born This Way," was released Monday.