The Blackthorn Amusement arcade, based at Bridgend, was very popular with people on both sides of the border.
The blaze was spotted at around 6.15am this morning by a passer-by.
A total of five crews from both Donegal and Derry rushed to the scene to bring the blaze under control.
However by the time they got there, extensive damage had already been done tot he two storey building.
Nobody was hurt during the fire.
Three crews from Derry were at the scene along with two fire crews from Buncrana and Letterkenny.
Donegal Assistant Chief Fire Officer, Michael Scott, said the building had been “completely gutted”.
“When the brigades arrived the fire was coming through the roof,” he sai
A Garda source source said they have still not discovered what started the blaze.
“It’s early days but the forensic team will find out soon enough what started the blaze.
“A full examination is underway to determine if the fore was mere accidental or if it could have been something malicious,” he said.