Almost 50 firefighters and 11 fire appliances are at the scene. The police are also in attendance.
The Western Health Trust has reassured the public that "there are no injuries and the incident is under control".
It has set up helpline numbers for anyone concerned about the fire. They are 028 7129 6202 and 028 7129 6204.
'Major incident'The Northern Ireland Ambulance Service (NIAS) said it had "declared a major incident" at 19:34 GMT on Friday, following reports of a fire at Altnagelvin Hospital and "the potential requirement to move large numbers of patients".
It added that hospitals throughout Northern Ireland and County Donegal have been informed and "stand ready to receive patients if necessary".
In a statement, NIAS said it had been informed that, although the fire was "contained within a relatively small area, other wards had been affected by smoke and water damage".
Speaking from the scene, Mark H Durkan from the SDLP said it had been a "chaotic evening" and there were "emergency vehicles of all types all over the hospital grounds".
He added that it appeared that calm was gradually being restored.
The MLA said he had been speaking to senior management at Altnagelvin and it was his understanding that the fire broke out on the roof, where water tanks are stored.
"Whatever happened - these tanks collapsed or burst - and that water has come down...through the roof and through ceilings and floors," he said.
Transport
SDLP MLA Mark H Durkan said it had been a "chaotic evening" at the hospital Mr Durkan said he understood that that water had passed down from the tenth floor to the third floor - leading to the evacuation of all eight affected wards.
The Western Health Trust said firefighters, police and ambulance staff were "on site assisting with the evacuation of a number of wards".
Translink buses are being used in the operation.
The trust added: "Patients in the affected wards are being transported to appropriate hospital or other care settings."
It has advised visitors not to come to Altnagelvin until further notice.
The entrances to the hospital have been closed to all non-emergency personnel.
Just over two weeks ago, two wards in Altnagelvin were evacuated after a small fire broke out in an electrical switch room.
Twenty patients were moved to other parts of the hospital while 30 firefighters brought the blaze under control on 6 November.
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