A man has been arrested after a unit fire in inner Sydney led to the discovery of a drug laboratory, police say.

Residents of a unit block in Waterloo had to be evacuated after the building caught fire about 11:30pm Wednesday.

Police said it is believed the fire started in the clandestine laboratory, which was discovered after the blaze was extinguished.

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A 31-year-old man was arrested and taken to the Royal North Shore Hospital under police guard to be treated for burns.

Inspector Shane Halliday said two police officers were tested for chemical contamination.

“A number of police officers had to be decontaminated by the fire brigade at the scene, and two were conveyed to hospital for further treatment,” he said.

“From examination of the unit, police located a clandestine lab, which has been sealed off and designated a crime scene for further investigation.”

The fire damaged several rooms in the unit.

One resident of the unit block said she became aware of the fire when she heard neighbours yelling.

“I was just loading the dishwasher and I heard [a] commotion outside,” she said.

“I came out on the balcony and the people at the building across from my apartment were screaming that there was a fire and that we had to get out right now, so I just grabbed my stuff and ran.”