Sergeant Mark Gill understood everyone has been safely evacuated.
Queenstown man Dave Boyd, who has owned The World Bar building for three years, said he was gutted.
"We don't know [what caused it]. It's too soon to say.
"The fire brigade are doing a brilliant job. My heart sank [when I saw it].''
He confirmed the building had no sprinklers.
The World Bar is one of the most popular bars among backpackers and locals, hosting big name music acts.
Witness Simon Lynn said it looked like firefighters were fighting a losing battle.
"When it started we saw one of the cooks outside. He was in chef whites and outside looking really stressed, saying 'oh my God'. Then the fire crews arrived.''