The Scottish Fire and Rescue Service have confirmed they are in attendance at the building.
Videos and pictures on social media show the hotel completely engulfed in flames.
Twitter user @edglasgow59 wrote: “The Lundin Links hotel in Lundin Links has burnt down.
“It shut years ago but nothing was done with it.
“Everyone in the area expected the Hotel to mysteriously catch fire as permission wasn’t available to pull it down.”
A total of seven crews plus specialist equipment and high appliances have been called to the scene.
Local residents have reportedly been evacuated from the area after crews were called to the blaze just after 8:30pm on Thursday.
A Scottish Fire and Rescue spokesperson said: “We were alerted at 8.36pm to reports of a fire at a derelict building on Leven Road at Lundin Links.
“Operation control mobilised seven appliances, two height vehicles and two specialist resources to the scene.
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Everyone was safely evacuated and no injuries were reported.
The Popinjay Hotel wrote on Facebook: “We are able to let everyone know full evacuation of all staff and guests completed quickly without injury to anyone.”
It added that the fire was now being investigated, reported the BBC.