Police said once the tram began moving away from the Goulburn St intersection, the teenager became trapped.
The girl is believed to have been dragged about 100m while her distraught friend screamed for help, alerting the driver to stop at the light rail station at China Town.
Friends have begun to share tributes to the young woman in the wake of her tragic death.
”I love you and i missed you our beautiful angel Kyra Dulguime we will missed you so much...” one said on social media.
”Rest in peace in the arms of our lord and may the perpetual light shine upon you.”
Witnesses told Nine News the teenage girl was trying to cross George St by jumping through the gap between two carriages before she became trapped beneath the tram.
”We were screaming, ‘help her, help her’, so the police and paramedic rushed to the spot,” one man recalled.
Passengers on board the tram could only watch on in horror as the tram ground to a halt.
A police rescue crew with the help of Fire and Rescue NSW (FRNSW) worked to free the girl.
Paramedics treated her at the scene but she died at the scene.
The 52-year-old male tram driver was taken to hospital for mandatory testing.
A crime scene was established and an investigation is now under way into the circumstances surrounding the tragedy.
Light rail services between Central and Circular Quay were halted throughout the morning while investigators combed the scene.