About 750 people were in the club, Neighbours, when the fire broke out just after midnight Tuesday, but Mayor Ed Murray said there were no injuries.
The Seattle Times said someone in the club turned a fire extinguisher on the flames, someone else pulled a fire alarm, and a sprinkler system activated -- so the fire was contained in short order and property damage was limited to about $1,000.
Seattle Fire Department spokesman Kyle Moore said the situation "could potentially have been much worse."
"You have an establishment full of patrons and an intentionally set fire," he said. "That's a very dangerous situation."
Investigators said there was no indication the arson at the club -- which bills itself as the city's largest and longest-running gay club -- was a hate crime.
"If there's any indication it's a hate crime, we'll pass it on to our bias unit," said Seattle police spokeswoman Renee Witt.
The fire came hours before Murray -- Seattle's first openly gay mayor -- took office.
There had been no arrests by late Wednesday, the newspaper said.