Authorities fear an erratic bushfire that gutted a Blue Mountains home and damaged others could again threaten residential streets.

Crews are working through the night to contain the blaze on Katoomba’s outskirts after it flared up and jumped containment lines on Saturday afternoon.

The fire is believed to have been deliberately lit, and was one of more than 70 fires that broke out in sweltering conditions across NSW.

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Authorities initially believed two Katoomba houses were destroyed but later confirmed only one had been lost.

While the bushfire has been downgraded to a watch-and-act level, Rural Fire Service Commissioner Shane Fitzsimmons says strong overnight winds could push the fire head towards streets in the town’s west.

“Let’s hope it doesn’t but given the forecast there is every potential it could,” he told reporters.

The fire has dropped over an escarpment and is being monitored by firefighters overnight. Mr Fitzsimmons said it was too dangerous to send crews down into the fireground.

One firefighter was taken to hospital suffering smoke inhalation. A resident was also hospitalised with chest pains.

The emergency comes as the Blue Mountains community continues to recover from last year’s devastating bushfires.

More than 200 houses were destroyed when fire ripped through the towns of Winmalee and Springwood in October 2013.

Blue Mountains mayor Mark Greenhill, who checked himself out of hospital on Saturday to head to Katoomba, said his heart sank when he heard a house was gutted by fire.

“Fortunately the property loss we are talking about tonight is nowhere near what we experienced last year,” he told reporters.

“Nevertheless, when this community hears about bushfires affecting this city… their minds turn back to what occurred and there is an edge that springs into people’s step.”

About 100 people sought refuge at the Katoomba RSL at the height of the fire threat.

The RFS is treating the bushfire as suspicious, with no initial signs that lightning started the blaze.

The weather is expected to be more favourable for firefighters on Sunday, with Sydney region temperatures in the low 20s and winds between 15-25km/h.

AAP