It is believed hundreds of people have been evacuated from the area as the fire burns through several levels of the multi-storey building on Randle Street near Central Station.
The fire is sending large plumes of smoke into the air with some sections of the exterior walls crumbling onto the pavement below.
Both NSW Police and Fire and Rescue have warned people to stay away from the scene.
“Firefighters are currently on scene at a large multi-storey building fire,” Fire and Rescue NSW said.
Police added that several road closures are in place around Central Station.
“Motorists and commuters are advised that due to a major fire at Randle Street, Surry Hills, evacuations and road closures are in place around Central Railway Station,” NSW Police said.
It is believed the fire started on level three of the building and aerial footage shows it tore through the entire structure.
Trains are still running from Central Station and witnesses are watching from platform 22.
Flames and embers spread to cars below and a nearby building.
Witnesses have reported hearing a big bang about 4.40pm.
At least eight fire trucks are tackling the blaze.
Witnesses on the ground during the evening commute described the chaotic scene.
“Probably one of the biggest building fires I’ve seen in the city,” 9News senior cameraman Mike McGee said.
“I first got off the train and saw the smoke.
“That was pretty much before any fire trucks or police had arrived.
“There were flames leaping out from every window.”
Light rail services on the L2 Randwick and L3 Kingsford lines have been suspended due to the blaze.
“Services are not running between Circular Quay and Moore Park due to a building fire,” an alert on the official TripView app says.
“Catch the train between Circular Quay and Central, and regular buses instead. Light Rail services are still running between Moore Park and Randwick, as well as between Moore Park and Juniors Kingsford.
“There are no reports of train services being impacted or delayed yet. 9News.com.au has contacted Transport for NSW for comment.
Chalmers Street and Randle Street are closed between Cleveland and Elizabeth Street. Elizabeth Street is closed southbound at Foveaux Street.