Man armed with gun flees after stolen car torched

An armed man with "shaggy hair" sporting a black hooded jersey was seen fleeing the scene after a confrontation about a stolen car which was set on fire.

Police were called to a basement car park of a residential building in Sydney's inner west suburb of Dulwich Hill after they were told the man allegedly torched the vehicle after stealing it from owners who confronted him.

Fire and Rescue NSW attended the scene and extinguished the fire, and no injuries have been reported.

The man then fled on foot through a nearby park with police releasing an image of the suspect on social media.

Mark Swan, one of the residents in the building, heard loud arguments when two men and a woman confronted the alleged offender before hearing a bang.

"We heard a bang, which I took to be a shotgun, and a fellow yelling, "I need a fire extinguisher'," he told AAP.

"So I opened my kitchen window and yelled 'there's a hose reel behind the wall there' but the garage had already filled up with smoke."

He said the whole incident lasted less than five minutes with helicopters roving above the suburb for an hour afterwards.

A crime scene remains in place on Friday afternoon and drivers are advised to continue avoiding the area where possible.

The man is described as being of Caucasian appearance, aged in his 20s, about 160cm tall "with a thin build and shaggy hair" and armed with a gun.