The fire, which occurred at a building in Saint Leonards, Hastings, has now been extinguished.
Police said two children had been taken to hospital, one with life-threatening injuries and a second in a serious condition. Three adults have also been taken to hospital for smoke inhalation and are in a stable condition.
Fire investigators remain at the scene to determine the cause.
Children as young as 8 had their burns doused in water at the scene, a nearby restaurant owner said. He said he helped a severely burned child.
The restaurant owner described wrapping a child in food wrap and pouring cold water on them - something he said he would never want to do again.
Fire assistant area manager Nigel Hall said they were called at about 2.50pm to the fire that was "well involved" by the time they arrived.
The fire service went to "third alarm" and had six appliances with 30 crew members.
Hall said it was in a derelict building, which wasn't in use for anything and there were no concerns about the building, as the fire was now out.
"We managed to get the fire under control quite quickly but unfortunately there were some casualties with two people taken to hospital with burns and a further two with smoke inhalation."
Smoke was seen billowing from a commercial address on Heretaunga St West, where police closed the road.
Staff from the next door building, David Jones Motors, were out dealing to a car when they saw flames rise up above the neighbouring fence line.
One staff member rang 111 while others, including a volunteer fireman, grabbed hoses from their garage and started spraying over the fence.
A nearby business owner said he could see a lot of smoke coming from the fire. He had heard a young boy had been burnt in the fire.
Motorists were being asked to avoid the Heretaunga St area.
Police were assisting with traffic management as there was thick smoke in the area.
Traffic was being diverted away from the Maraekakaho Road and Stortford Street intersections.
Diversions were in place at Townshend Street and Heretaunga St West and motorists are asked to postpone any travel in the area.
It was earlier believed the fire was at the Storty Bar on Heretaunga St West. The bar was closed after a fire in early 2016.
