A person died after a station wagon exploded into flames in Queenstown's Kelvin Heights on Tuesday

One person has been killed in Queenstown after a car exploded into flames, shaking houses in the area.

Witnesses reported armed police in the suburb of Kelvin Heights, where the station wagon exploded.

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FAIRFAX NZ Police are investigating the fatal car explosion. Sniffer dogs were used on Tuesday night and police considered searching vehicles for "an individual".

A police source confirmed the death.

Fire crews were called to the blast in the Jardine Park area about 9.05pm on Tuesday night.

Local resident George Shaw was watching the rugby on television when the explosion "shook the house".

RNZ Queenstown local Lindsay Shaw witnessed the fatal car fire last night, and said she heard a "horrendous explosion". She says it burst into blames almost immediately.

"She went off with quite a bang alright."

"It was like an earthquake."

Fire Service acting shift manager Lyn Crosson said when crews got there, the car was "certainly well ablaze".

"We had crews from Frankton and Queenstown attend, and a tanker from Arrowtown."

A police spokeswoman said there were "some police cordons in place while police are attending and undertaking some inquiries".

Sniffer dogs were called to the scene.

Bus driver Jamie Morgan was returning from Milford Sound to the Hilton Hotel, with 40 people on board, when he was stopped by police.

Morgan said he was told police would try to get the bus through as soon as they could, but if he went in, they would check the bus "for an individual" when it came out.

Crosson said a fire investigator was informed and would probably go to the scene of the blast on Wednesday.