More than 20 firefighters from four Stewartry units brought fire in the Georgian building under control after more than two hours but are continuing to dampen down the building.
The roof of the large back bar and public areas collapsed during the fierce blaze which saw flames shoot more than 30 feet into the air with thick smoke spreading across the town.
Staff, customers and residents at the hotel in the Georgian building in the town’s High Street escaped and no one is believed to have been injured.
Some nearby residents also left their homes at the height of the blaze in the town’s historic High Street.
A police spokesman said that the fire was discovered in the downstairs area of the hotel around 8 pm and quickly spread.
Firefighters from Kirkcudbright were quickly on the scene but the building was well ablaze.
They were joned by units from Castle Douglas, Gatehouse of Fleet and Dalbeattie and some were expected to be on scene for much of the night.