Fire crews were called in after smoke was seen coming out of an inspection cover on a pavement off Kingsway in Holborn area.
Firefighters said power cables had started a fire beneath the pavement and they could not put it out until the current was switched off.
London Fire Brigade confirmed that the electrical fire was caused among some cables and a 25-metre safety cordon has been put in place in the area, which also houses the LSE as well as the Indian High Commission building, India House.
"We are all in the basement as the fire alarms went off but the fire has not affected India House," a spokesperson said.
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Part of the LSE was cleared by the emergency services and the university was urging students to avoid the area.
Footage from the scene showed the air filled with dark smoke that appeared to be streaming from potholes and underground vents.
Students and office workers were among nearly 2,000 people evacuated because of the toxic smoke that filled the streets around Holborn.
Onlookers described "crazy scenes" and "madness" as smoke rose so high in the air that it could be seen from the Shard skyscraper.
Several buildings also suffered powercuts due to the blaze, forcing some companies to send staff home while the Holborn Tube station has been closed down for commuters after the Scotland Yard declared the fire as "major".