More than 50 firefighters and eight fire engines are trying to put out the blaze, which started in the sauna at Inspire Health and Fitness near Thornton’s on Thursday morning.
A spokesman for Lancashire Fire and Rescue said part of the roof of the three storey building has collapsed, but there have been no reports of injuries or casualties.
Many shops on Penny Street and Market Street were closed down and staff and shoppers evacuated from the area.
St Nicholas Arcades was also closed after smoke swept through the city setting off fire alarms.
The fire broke out at around 10.15am on Thursday March 24 and crews were on the scene within five minutes.
An eyewitness watching from offices in Moor Lane said the fire was “raging” and belching out smoke.
Around 6,000 litres of water per minute was being used to tackle the blaze.
Roads around Lancaster were gridlocked and people were seen as far away as Skerton bridge with hands over their faces due to the smoke spreading.
The smoke was described as a “massive fog” by our reporter on the scene Gayle Rouncivell who also said it was “mayhem” in Lancaster city centre.
A Lancashire Fire and Rescue command unit was parked in Market Square as fire fighters continued to tackle the blaze.
A post on the Inspire Facebook page said: “We just wanted to say thank you for all your kind wishes and thoughts.
“Yes, sadly Inspire is up in flames. The main thing is that everyone is out safely.
“We are all devastated and we will keep you all posted as soon as we know more. Thanks again for your support to all our members and friends.”