Two houses collapsed and a third suffered serious damage in the blast which happened around 2.40am in Mallowdale Avenue.
10 fire crews from around Lancashire were called to the scene which one emergency worker described as "devastating."
A witness at the scene said: "It felt like the house had lifted off its footings. I understand a child aged two or three has died.
"My son's friend found her door blown off and half her roof gone. This was at 2.30am.
"The electric went off and is still off but the gas is still on."
Dan Knowles, who lives four streets away from the explosion, said he had thought there had been an earthquake.
Describing the incident, he said: “My wife and I thought there was an earthquake which woke us, the whole house shook.
“We immediately checked on our kids and got back in bed. We then heard sirens and my wife checked Facebook, when we found out that there’d been a gas explosion.
“We stayed indoors and switched everything off at the source and then sat up all night worrying.”
Casualties, believed to be suffering from serious burns, were taken to hospital in a fleet of ambulances.
Police evacuated houses in the vicinity of the explosion and cordoned off the scene.
A spokesman for Lancashire Police said: "We remain at the scene of a suspected gas explosion on Mallowdale Avenue, Heysham.
"We were called at 2.40am this morning (Sunday May 16) to reports that a number of houses on the road had collapsed.
"Our officers attended and found two houses collapsed and serious damage to a third property.
"We can now confirm that sadly a young child has died as a result of the incident. The family have been informed and our thoughts remain with them at this distressing time.
"Another four people, two men and two women have been taken to hospital. Two of those people have serious injuries.
"A search of the site is still ongoing with Lancashire Fire and Rescue and North West Ambulance Service also in attendance.
"A safety cordon has been put in place and nearby residents have been evacuated.
"We are currently working with gas service engineers to make the area safe.
"Road closures also remain in place and people are being asked to avoid the entire area while we deal with this ongoing incident.
Electricity North West cut off supplies to the area around the scene.
A spokesman said: "Due to a major incident in the Heysham area our engineers are removing supplies for safety reasons.
"Given the nature of the incident we are unable to confirm how many properties will be affected or how long this will be for."
The MP for Morecambe and Lunesdale, David Morris has said his prayers are with all the families affected by the explosion.
He took to Twitter to say: "My thoughts and prayers are with all of the families on Mallowdale Avenue following the incident this morning. Thank you to all of the emergency services who are currently on the scene. "