Ten fire trucks were sent to the store, near the corner of Pitt and Market streets, when it went up in flames shortly after 6:00am (AEST).
Dozens of people stopped to watch smoke billow from the three-level building, many taking photos on their mobile phones.
The fire has been put out with the help of two cherry pickers used to spray water, but traffic is heavy in the CBD as a result.
Fire Brigade Superintendent Craig Brierley says there were reports that squatters were inside the building when the blaze began.
"No-one is in there but as crews work through and completely extinguish the fire, they'll obviously do another thorough search and make sure no-one was inside," he said.
Supt Brierley says there were initial concerns the blaze could spread to the State Theatre.
"Access was a bit of an issue," he said.
"It's behind a lot buildings. That's why we were worried about those close by, but [crews] were able to get in from two directions, which made our job a little bit easier.
"We were able to quickly contain and just about extinguish this fire."
It is understood the Hilton Hotel was at capacity when it and the gym next door were evacuated as a precaution.
Hundreds of guests, some still in their bathrobes, have now returned to their rooms.
The fire has disrupted peak-hour traffic, with Pitt Street closed between Park and Market streets, and Market Street closed between Elizabeth and George streets.
Police are also turning away businessmen and women as they head for their offices.
The ambulance is on stand-by but no-one has been injured.
Source: By Australian Broadcasting Corporation
