I could not think of this reaction fitting into any of the reactions I know except the aryne mechanism. And hence I came up with the following mechanism after seeing the answer (which I've written in the picture next to question). Please tell if my proposed mechanism is correct.
Also, I am highly unsure of the fact that the last species formed will be able to extract a hydrogen atom from somewhere in the solution.
This is my proposed mechanism:
Source: Joint Entrance Exam (JEE) 1997 India