The fire broke out in the last half hour at Lighting Concepts close to the Port Bridge at the main entrance to the town.
There is now a major backlog of traffic into the town as cars slow down.
It is still unclear if there have been any injuries as a result of the fire.
One eye witness told Donegal Daily that it looks as if the fire is still blazing at the top half of the two storey premises which is next to Kelly’s Toyota garage
“it looks pretty serious but I have not heard if anyone was hurt.
“There is a lot of smoke and flames coming from the upstairs part of the building.
“I saw an ambulance, a fire brigade and the Gardai are at the back of the premises.
“Hopefully nobody was hurt,” said the man.