Witnesses say a burning crane swayed violently over a central Sydney building site before its arm crashed on to the roof of a nearby building.

The crane's operator was forced to flee after the blaze broke out in a 1,000-litre diesel tank within the 65-metre-tall crane at the University of Technology Sydney (UTS) building site in Ultimo just before 10am (AEDT).

Witnesses said they saw the crane's arm swaying violently before it came crashing down.

Photos posted on social media showed the arm crumpled and lying on the roof of a nearby UTS building.

Inspector Mark Reilly from the fire brigade says hundreds of people from the building site and surroundings buildings were evacuated.

No-one was injured in the incident.

"At one stage the cables holding the fly boom were impinged by the fire, and because of the heat they snapped and of course caused the fly boom to fall," he said.

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Firefighters had tried to get near the blaze with a cherry picker but the crane was too high.

Eventually they had to leave the fire to burn itself out. It was still smouldering two hours later.

The fire forced traffic on nearby Broadway to be closed in both directions.

WorkCover New South Wales has begun a full investigation into the collapse.

Brian Parker from the CFMEU says the union shut parts of the site down several weeks ago over safety concerns.

"We asked for a strict maintenance regime to take place immediately, it hasn't been done," he said.

WorkCover spokesman John Watson says it is amazing no-one was killed.

"This is a very major incident. The collapse of a tower crane is a most unusual event around the world."