Onlookers spoke of their disbelief that such a tragedy could strike so soon after the collapse of the West Pier on December 29.
Mike Owen, from Guildford, Surrey, called the fire brigade just before 7.25pm.
He was staying at the Hilton Metropole for the national annual conference for electoral administrators and had been for a walk around the pier when he spotted the fire.
He said: "All at once there was a flash. Something blew through the roof and landed in the water, although I didn't hear any explosion.
"I could not believe it, having lost one pier in gales. I hope we're not going to lose it too."
Lawrence Latham, 39, from Hove, said: "We were by the Doughnut on the shore and saw the fire. We could feel the heat and there were sparks flying everywhere."
Tony Graham, Scot Armet and Tyna Mcloughlin of St James' Street, Kemp Town, went to the seafront after neighbours told them of the fire.
Mr Graham said: "It will really be a shame if it's badly damaged because it is one of the major tourist attractions. It is one of the first places people go to when they come to Brighton."
Mr Armet said: "It will be awful if both piers are gone, but hopefully they won't."
Rob Berskal, 36, from Kemp Town arrived at the pier after being called by his taxi-driver brother.
He said: "I arrived from the eastern side and saw a massive plume of smoke and flames jumping up over the dome. They must have been 30ft high and reached the top of the helter-skelter.
"When I saw it I was in total disbelief. At first there were only 20 people watching beside me but within five minutes a huge crowd had gathered.
"I remember seeing people walking off the pier very calmly despite all the chaos around them. They did not seem to be panicking.
"It seems to be quite ironic that this pier has been damaged so severely when we have all been concerned about the West Pier."
Fraser Morrison, 39, from Queens Park Road, a member of the performance dance outfit Stomp, was told about the fire at 7.30pm after being called from friends in New York, Estonia and Glasgow who had all heard.
He said: "As I was walking my phone just kept ringing. I couldn't believe so many people across the world knew about the Palace Pier being on fire before I had even seen it. It just goes to show what a landmark it is."
Student Edward Lloyd, 20, from Brighton said: "Although it's sad it's on fire, it looks strangely beautiful against the night sky."
Rebecca Johnstone, 20, a student from Brighton said: "I have been on the pier quite a few times and loved every minute of it.
"I'm from Lancashire originally but everyone knows about the pier. None of my friends ever wanted to go on the helter skeleter so I never went on it. I guess now I never will."
Denise Gocksen, 26, was walking along Marine Parade. She said: "I thought it was a fireworks display because all the pier's lights were still on."
Mike Watts, who runs a fish shop in St James' Street, Kemp Town, stood on the seafront watching smoke pour from the stricken pier.
He said: "This really isn't a good start to the year for Brighton. I haven't been on the Palace Pier for a long time. The West Pier is the real tragedy of the city".
Peter Johnson, 48, from Blackpool, was staying in a seaside hotel overlooking the pier.
He said: "I looked out of the window and saw what I quickly realised was a pretty big fire. Within minute,s several fire engines arrived at the scene and I watched as they tackled the fire.
"I would say the flames were more than 20ft or 30ft high. I hope no one was injured. It was shocking."
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