Five helicopters with monsoon buckets and fire crews from Wanaka, Luggate and Hawea have been battling the fire, which burnt through up to 160ha of vegetation at the western end of the Central Otago town this afternoon.
Flames could be seen moving rapidly up the side of Mt Alpha at the end of Bill's Way, above the Wanaka Top 10 Holiday Park.
A person in the camping ground, who wished to remain anonymous, said holidaymakers there had been told to pack their cars and be ready to evacuate at a moment's notice.
Central Otago assistant area manager Steve Jones said the fire had burnt between 120ha and 160ha of vegetation.
Up to eight appliances and between 30 and 40 firefighters were battling the blaze, Jones said.
The cause of the fire remained unknown.
A Fire and Emergency New Zealand spokesman said the service was first alerted to the blaze about 2.50pm.
The fire was visible from central Wanaka and crowds of people were watching.
An Arrowtown Council worker has posted to Facebook to ask residents to stay away from Mt Aspiring Road to allow emergency services full and clear access to the fire.
Helen Grant, who is holidaying in Wanaka, said locals were speculating that the fire had started within the campground.
"There's a nice breeze taking it away from the town at the moment but...you can smell smoke across the town, definitely," she said.
"It's got a good head of steam...They're miles off being on top of it," Grant said. "It's so dry down here - the ground is just parched."
Additional reporting Otago Daily Times
