The fire is expected to smoulder for days near Queenstown.

Police on Friday morning urged Queenstown residents to stay indoors and close windows and doors to keep out the fumes, and to shut down air-conditioning units.

Residents were also urged to wear masks if they went outdoors at times the wind was blowing smoke over the town.

The Australian Tyre Recyclers Association said the "toxic" fire was a stark reminder why used mining tyres should not be allowed to be stored at mine sites.

'Used tyres are permitted in Tasmania and the rest of the country to be left on site under state laws, while the rest of us rightly pay for our own used tyres to be recycled," executive officer Robert Kelman said.

'These tyres last in the environment for thousands of years.

"Or worse, they catch fire, endangering human health and the environment due to the toxicity of the smoke.

"All state governments should be banning this material from being dumped on site immediately."

Mine owner Copper Mines of Tasmania said the cause of the fire was being treated as suspicious.

"The cause of the blaze has not yet been determined, but Tasmania Police and the TFS are treating it as suspicious," the company said

The blaze in a gully near the mine broke out overnight.

CMT said it was working with the TFS to extinguish the fire in a stockpile of old tyres at the abandoned Royal Tharsis mine site.

"The Tasmania Fire Service has done a fantastic job to knock down the blaze and stop the fire spreading, but, unfortunately, it is likely to smoulder for some days," CMT acting general manager Clint Mayes said.

The Environment Protection Authority would monitor air conditions to ensure public safety.

CMT estimated there were about 1000 large truck and loader tyres and about 500 light vehicle tyres stored in the area.

The TFS said three crews were called to the fire just after 12:30am on Friday and arrived to find about 2000 tyres on fire in a gully.

"The gully is approximately 500 metres deep and is difficult to access," the TFS said.

The Mount Lyell copper mine is owned by CMT's parent company, Vedanta Resources, and is up for sale.

It been on care and maintenance since 2014.

Mr Mayes said the blaze had not affected mine infrastructure.

He said it and would have no impact on the mine sale process or CMT's future operation.