Owner and head chef Lucas Parkinson said he had been told the fire had started after the towels, fresh out of the dryer, combusted in the laundry bag under the bar, causing a neighbouring argon gas cylinder to explode and set alight part of the restaurant about 5am on Sunday.
Although it has left significant damage to the interior that will likely need a complete rebuild, Mr Parkinson said it could have been worse.
As the bar was pure marble, Mr Parkinson said it ``encased'' the fire, and meant it burnt only one side of the restaurant.
Had it not been for that, the entire building could have gone up in flames, he said.
He was devastated when he received word of the damage at 10am on Sunday.
``It's 13 years of dreams and perseverance up in smoke.
``The damage is expensive not structural ... but a complete rebuild [of the interior] is likely necessary due to the smoke damage throughout the building.''
The fire was virtually identical to a 2012 fire at Wellington's Backbencher pub, where a pile of freshly dried tea towels caught alight, gutting the premises.
A combination of oil and steam is thought to have caused the combustion on that occasion.
Since he shared news of the fire on social media on Sunday night, Mr Parkinson had been overwhelmed by supportive messages from the community.
``The support from the community has been huge. I haven't had time to go through everyone's messages and phone calls yet but I will when I can.''
There was no knowledge of how long it would take to rebuild and reopen, he said.
Fire investigator Mike Cahill could not be contacted yesterday but Wanaka Volunteer Fire Brigade fireman Ian Galloway, who attended the scene, confirmed he understood the cause was combusting tea towels.
