A bushfire jumps the Bells Line Road north of Lithgow (EPA)
NSW Rural Fire Service Commissioner Shane Fitzsimmons said it had been a "very difficult and dangerous day" of "extraordinary fire behaviour", with blazes travelling vast distances due to the winds.
"This is as bad as it gets, you're talking destructive, damaging, and people losing everything they own," Fitzsimmons told reporters.
"I think we will be counting properties in the dozens if not the hundreds."
No fatalities have been reported so far, while just one firefighter has been injured, but Fitzsimmons said there were "many hours yet still to run" with a forecast thunderstorm and change of wind likely to complicate efforts.
"It's going to be a long, difficult and dangerous evening ahead," he said.
Sean Butler stands in front of his 1958 bus after fighting a fire with five other residents in the historic township of Newnes Junction north of Lithgow (EPA)
Springwood man Joe Moore told Sky News his home had been razed while an estimated 40 other houses had been lost in the village, though that figure could not be confirmed by officials.
"It's about as bad a situation as we could ever have hoped for," he said.
"It's one of those things, if you want to live up in the Blue Mountains it's a beautiful place to live, but it has the dangers of nature's ferocity like we had today."
The blaze was believed to have started when a power line came down in strong winds, according to media reports.
Fire and Rescue officers from New South Wales try to extinguish a bushfire burning on the outskirts of Lithgow, west of Sydney (EPA)
Sydney health authorities issued a respiratory alert after a blanket of smoke settled over the city, bathing familiar landmarks including the Opera House and Bondi Beach in an otherworldly amber hue and causing ash to rain from the skies.
The plume was so thick it showed up on the nation's weather radar.
The NSW Rural Fire Service said it was bracing for "erratic and dangerous conditions for the next few hours" as a southerly wind came in, with flames descending the mountains and jumping across the Nepean River on the outskirts of Sydney to start a fire near the city of Penrith.
Strong winds forced the grounding of water-bombing firefighting aircraft and residents of the Blue Mountains were urged to stay off the roads to clear the way for emergency vehicles.
Fitzsimmons said there would be a reprieve for fire crews on Friday with cooler, less windy conditions expected, but the danger would ramp back up on Sunday and Monday when temperatures soared once more.
Wildfires are common in Australia's summer months between December and February, and authorities are expecting a bad season this year due to low rainfall in the winter and forecasts of hot, dry weather ahead.
A devastating firestorm ripped through southern Victoria in 2009, razing thousands of homes and killing 173 people.
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