Around 60 firefighters have been battling to bring a blaze under control at the Longscar building on Seaton Carew's seafront.
Cleveland Fire Brigade was called to the Longscar Centre just after 8pm and has sent five appliances and an aerial ladder platform to the scene.
Witnesses say hundreds of people turned out to watch the incident unfold on The Front with police putting up a cordon and closing the road to traffic.
Flames have been seen from the roof, with a large amount of smoke caused by the fire.
Among those to spot the fire was John David McDade, who lives in Glasgow and is a freelance journalist.
Speaking from the scene, the 37-year-old, who is visiting family in the town, said: "I just saw a plume of white smoke in the air and then saw one fire engine and then the platform.
"Smoke is coming out of the roof.
"We've counted and there must be about 60 firefighters.
"The police then kept the crowd back and over the space of 20 minutes, half an hour, the building is now just a shell.
"I think they'll be here for a good couple of hours yet, it's a sad end to a bank holiday.
"There's a good couple of hundreds people here and there are two cordons, one at each end."
A spokeswoman for Cleveland Fire Brigade said: "We are currently in attendance at the Longscar Centre on The Front in Seaton Carew.
"Our time out of call to this was 20.02 hours and at the present time we have five pumping appliance and the hydraulic platform in attendance.
"The building is alight and smoke is issuing from all parts of the building."
Householders in the area were warned they would face power cuts for two to three hours shortly after the blaze, as Northern Powergrid carried out emergency repairs.
The Longscar centre, which is privately owned, has been vacant since 2009.
An attempt by Hartlepool Borough Council to force the owners to sell failed following a public hearing.
The council had to redraw their plans after a Compulsory Purchase Order for the derelict Longscar Centre was rejected.