The fire brigade was called just before 3pm as South Melbourne residents saw flames coming out of Spitiko restaurant.
The fire burning out of control led to a smoke warning at 4pm from Melbourne Fire Brigade asking people to stay away from Park and Perrins streets.
“There’s a significant amount of smoke coming from the building, we will be issuing a smoke warning and asking people to avoid the area,” an MFB spokeswoman said. “There is currently no threat to the community, but you should continue to stay informed and monitor conditions.”
Six fire trucks were called on the scene while Emergency Services may remain in the area for the next few hours.
“Flames were coming out of the chimney on top of the building straight away, it took over pretty quick,” a witness named Jeff told 3AW.