UPDATED 5.37PM: Two bodies have now been removed from the site of a fatal house fire in Palmerston North.

The dead are suspected to be a grandmother and a six year old girl.

Other members of the family remain hospital.

NZME. reporter Jimmy Ellingham said family and friends arrived at the house this afternoon and a rousing haka was performed as the two bodies were removed.

He said the cordon around the home has now been lifted.

Police said there are indications that an active smoke alarm may have woken some of the family members in the Housing New Zealand house.

 

The Housing New Zealand property had smoke alarms reinstalled less than a year ago. Eleven were installed throughout the two storey home - which was due to be inspected again this November.

Palmerston North mayor Grant Smith said the tragedy will resonate across the city.

"It's very topical in our community, and really sad because it was a large family and to have a couple of deaths within that family is really tragic."

Neighbour Sherry said she ran out in her nightdress after hearing the commotion and looking out to see the flames.

She said it was horrible, and she couldn't do anything to help.