Residents from 100 Dunedin houses evacuated over fears a raging fire could spread from a nearby industrial area are returning home, just as the city prepares for possible flooding.

The residents were given the green light to return home during a community meeting on Thursday morning after heavy rain helped firefighters contain the fire, incident controller Phil Marsh said.

At the height of the blaze on Wednesday, six helicopters, 25 crews and about 100 personnel had fought the fire in the suburb of Burnside.

Dozens of firefighters then used excavators overnight to create a firebreak on the western flank of the fire as crews patrolled the nearby residential area to put out hotspots and prevent any flare ups.

Their efforts were aided enormously when about 8mm of rain fell on Dunedin from midnight, Marsh said.

Specialist crews will now work on Thursday morning to ensure there are no flare ups, with mop up operations expected to continue on for several days.

While fire crews felt sorry for those who lost industrial buildings, Marsh said the damage cold have been "so much worse".

"The majority of residents were very happy with the response that we've given, it's been extreme weather conditions and we've been working really, really hard," he said.

The nearby Concord School, which has a roll of about 70 students, will now open for classes on Thursday.

Two fire investigators will begin work determining the fire's cause.

And while overnight rain helped dampen the fire, it could now prove a "double- edged sword".

"We're expecting over 50mm of rainfall in Dunedin today, so we are probably planning for flooding in the area," Mr Marsh said.

"We're going one extreme to another."

Meanwhile, a fire at a wood chip mill near Invercargill could burn for a number of days, firefighters say.

The fire at the mill south of the city also broke out on Wednesday afternoon and was initially contained but a significant wind change caused it to flare up and jump to a pile of logs.

"These logs and large mounds of wood chips are proving difficult to fully extinguish," said principal rural fire officer Elton Smith.

Three diggers were used to separate wood stacks so five helicopters could dump water and reduce the fire's intensity.

The Bluff-Invercargill Highway was closed for a short time because of heavy smoke crossing the road and the rail link was also briefly interrupted.

A nearby fertilizer plant was evacuated because of smoke and embers being blown across the road, but it sustained no damage.

The fire site will continue to be monitored by Fire and Emergency NZ personnel over the coming days.

- NZ Newswire