Around 30 firefighters tackled the fire, which broke out inside a bedroom on the first floor of The Broadway Hotel, in Burlington Road West, South Shore, shortly after 2am.
A search of the four-storey building was carried out following fears people could be trapped inside, although nobody was found.
It later emerged two people who were inside the hotel at the time of the fire got out safely, police said.
Crews remained on the scene for almost three hours, putting out the flames and clearing the property of smoke, Lancashire Fire and Rescue service spokesman John Taylor said.
Hotelier Charles Ruppert, 66, who owns The Colwyn Hotel next door, said 17 of his guests were evacuated until 3.30am after smoke from The Broadway began to spread.
He said: “I thought there might be a fire here because the alarm went off.
“We started evacuating straight away. Once everybody was out we looked on the far side of the hotel where the rooms are connected [to the Broadway] and we found three rooms filled with smoke.
“It was so dense it was unbelievable but there was no fire coming through.”
Staff at the Colwyn yesterday faced a race against time to get the hotel ready for the weekend, when it expects to be filled with guests.
Holidaymaker Clive Glover, 51, who was staying at the Grand Beach Hotel, opposite The Broadway, while visiting the resort from Worcester, said: “I looked out and saw the fire brigade and police go past.
“This is not the first thing you expect to see when you come on holiday to Blackpool.”
The Broadway closed last year after it became embroiled in a row over a Trip Advisor review, but is believed to have reopened recently under new management.
Hotelier counts the cost of fire - again
Yesterday’s blaze means former restaurateur Charles Ruppert has been left counting the cost of fires at neighbouring hotels twice in just four months.
The 66-year-old, who is originally from Germany, said he lost four bedrooms at The Headlands on South Promenade when an inferno tore through the Warwick Hotel earlier this year.
While 17 of Mr Ruppert’s guests were evacuated from The Colwyn Hotel yesterday morning, around 40 were told to vacate their rooms at The Headlands in June.
Mr Ruppert said it took around three months for his insurance policy to pay out for the damage to the four rooms and said he has fire alarms that call his mobile phone if they go off, and has hired a safety consultant.