More than 240 homes were damaged in the Dukezong Ancient Town in Yunnan province, forcing more than 2,600 people from their homes, China's official Xinhua News Agency reported.
The fire took nine hours to put off, said a local government spokesman.
The Yunnan government said on its website "even though many rushed to help at the first instant, the dry conditions and the speed of the blaze allowed it to spread rapidly in all directions," the New York Times reported.
Cultural relics and Tibetan art works also were lost in the blaze.
Fire officials said they had ruled out arson as a cause of the fire.
The town was built 1,300 years ago and was a landmark on the South Silk Road, a route that connected China to India and, eventually, Europe.