A 36-year-old woman has been arrested after an Australian flag was lowered into the Flame of Remembrance and burned at Sydney's Anzac War Memorial in Hyde Park yesterday.

Police had earlier released CCTV footage of a woman suspected of the act and made the arrest at around 2:20am this morning at Central Station after a tip-off from a member of the public.

She is currently being questioned at Sydney Police Station.

Emergency services were called to the memorial shortly before 1pm yesterday, after several reports of a small fire inside the building.

Inside, police officers found an Australian flag had been lowered down into the flame of remembrance in the centre of the memorial and set alight.

Police said yesterday they were mystified by the attack but are sure it was not a random act.

"She's walked up to the upper gallery level, walked around the area there and stepped over a roped-off room where the eternal flame is,” Sydney Local Area Command’s Superintendent Mark Walton said.

“There’s no information to suggest any motive and why it has occurred.

“I’m not going to go into the political climate – I’m here as a police officer to deal with a crime.”

The incident has shocked the state, with the Returned Services League and the NSW Minister for Veterans’ Affairs Victor Dominello condemning it.

“Not only is this criminal behaviour, it is deeply disrespectful of the Memorial and all it represents,” Mr Dominello said.

“The Anzac Memorial is a public space which is always open for people to visit and pay their respects. The flame of remembrance within it provides a site for quiet contemplation.

“It is deeply concerning that any person would seek to desecrate the Australian flag. Doing so on this sacred site makes it all the more reprehensible.”

NSW RSL president Don Rowe urged anyone with information about the attack to speak with police.

“Veterans and their families will be outraged by this attack on a sacred monument dedicated to thousands of Australians who have fought and died for their country,” he said.

Locals also told 9NEWS of their disgust at the offence.

“These guys and women fought for us, and lost their lives,” Brian Pearson said.

“Why should somebody wreck such a place?”

Built in 1934 the memorial is the largest of its kind in Sydney and hosts ceromonies on both Anzac and Armistice day.

Kept in the flame room, the Flame of Remembrance is kept lit only during the Memorial’s opening hours.

The Flame of Remembrance was donated by the Australian Gas Light Company (now AGL), with it designers hoping it would symbolise eternal life and the remembrance of war dead.

In addition to the Australian National Flag, the flame room is also home to a range of historic flags, including the flag of New Zealand and the NSW state flag.