Firefighters have been battling the blaze in Maspalomas on Gran Canaria for the last few hours.
One person has been injured and has received treatment for burns to their leg.
The fire broke out in a building next to Aqualand at about 5.30pm and families enjoying the water attractions were told to leave immediately before the toxic fumes engulfed the park.
Holidaymakers ran for their lives, most still wearing their swimming costumes and covering their faces with towels.
One tourist in the water park, Jorge Rodriguez said: “We were able to leave very quickly thanks to the technical and personnel team.”
A spokesman for the fire brigade said an accumulation of rubbish inside the building made the fire spread rapidly. Medics and police are also at the scene.
Fire personnel searched the premises to make sure no-one was left inside or trapped but the water park itself had been evacuated just after the alarm was raised and before the thick black smoke enveloped the site.
The intense smoke was visible from several miles away and numerous people raised the alarm.
According to witnesses, the building in which the fire broke out was once used as a venue for celebrating events but is now some sort of homeless shelter.
The emergency services are still on the scene tackling the fire.
It appears there have been no serious injuries.
Dramatic pictures from the scene at the height of the fire showed tourists in their swimming costumes running away from the scene.
Other snaps showed the huge plumes of smoke billowing into the sky.
MORE TO FOLLOW