The fire began at Katoomba RSL just after 1.30pm, sending crews from the Blue Mountains and Sydney's west rushing to the scene.

It is thought the fire took hold in the roof, causing about 40 patrons and staff who were inside at the time to be evacuated without injury.

Hundreds packed the footpath to watch the firefighting effort as 50 firefighters from 10 surrounding stations - including some from Penrith, Huntingwood and St Marys - battled the blaze.

Superintendent Ian Krimmer from Fire and Rescue NSW said the first truck from Katoomba was on scene within seven minutes.

"It was reported the fire had taken hold of a roof area at the rear of the club buildings," Mr Krimmer said.

"The fire has quickly spread through the roof, causing the roof to collapse into the building. At least half the Katoomba RSL has become heavily involved in fire."

Roads around the RSL have been shut down, with fears one of the walls might collapse onto the roadway. Residents have been advised to keep away.

The fire continued to burn at the rear of the club on Friday afternoon, but it was contained to the building where it started, with crews also protecting buildings close by.

"There were fears a nearby house could become involved, but that's been saved by fire crews," Mr Krimmer said.

Students at nearby Katoomba Public School - on the same block as the RSL - were placed under lockdown as a precaution, before they were able to leave safely at the end of the school day.

An electrical storm over the Blue Mountains complicated firefighting efforts. Two ladder trucks were being used on the blaze around 3pm, and firefighters were temporarily brought back to the ground with fears of lightning strikes.

"That threat has now passed and the ladder trucks are back at work," Mr Krimmer said.

Sean Glassford, from Wentworth Falls, was driving into Katoomba when he saw what he thought to be dark clouds from an approaching thunderstorm.

When he got closer, he realised it was thick black smoke.

Firefighters initially focused on the front of the building, but soon the flames spread to the back, where several gas bottles are kept.

"From what I could see, it was pretty full on," Mr Glassford said. "As I was filming, the gas bottles at the back of the building started to explode."

The building was filled with smoke and flame, with orange flames rising metres from the roof.

Mr Glassford said the fire was a "big deal" for the local community, as the RSL was frequently used by locals, tourists and musicians.

"It's a pretty small community up here," he said. "A lot of people work there. A lot of casuals are now unemployed, and there's a lot of memorabilia up in smoke."

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