The building, which is opposite the State Parliament and covered by scaffolding and safety mesh, is understood to house barristers' chambers.
NSW Police said no one has been injured but morning peak-hour commuters should expect delays.
A spokesman for Fire and Rescue NSW said external scaffolding, not cladding, was on fire. Cladding on the front of the building was removed last week.
"It looked like it started around level six and it's gone all the way to the top," one witness told the Daily Telegraph.
"Now it's melted down the building and stripped everything else below it.
Another witness, Ignatius Corboy, told the Today show emergency services were using an extended scaffolding device to battle the remainder of the blaze.
"It is halfway up the building, seems to be a little bit still going," he told the show. "It is all under control now, but it is certainly extensive damage on the side of the building and the scaffolding seems to be ruined as well.
He added that there was a massive emergency presence and a huge crowd of onlookers while the fire was growing, but emergency services quickly cleared the area.
"They have done a fantastic job of clearing the scene and getting it under control," he added.
Witnesses say an exclusion zone starts at the start of Macquarie St and extends to the Woolloomooloo turn-off.
It is understood the fire broke out around 7.45am (local time) and two people were trapped at the top but they have since been rescued.
Witnesses say that, within five minutes of the fire starting, the whole building was ablaze. One witness told 9 News it appeared to be started by an electrical spark, which ignited plastic mesh.
The building at 233 Macquarie St is behind the Supreme Court of NSW buildings.
Macquarie St between Prince Alfred Rd and Hunter St is closed.
The fire comes three months after another major blaze in the CBD brought the city to a standstill and forced the evacuation of thousands of workers as gas bottles exploded.
Fire investigators tracked the cause of February's blaze to one of the construction workers' oxyacetylene blowtorches, according to a Fire and Rescue NSW spokesman.