Firefighters wearing protective breathing apparatus were called to D'Arblay Street, Soho, after reports of noxious smoke filling the air.
Police closed off three roads and evacuated homes following the alert.
Specialist crews broke down the door to the Thai Cottage restaurant at 1900 BST on Monday where they discovered the source - a 9lb pot of chillies.
The restaurant had been preparing Nam Prik Pao, a red-hot Thai dip which uses extra-hot chillies which are deliberately burnt.
But the smell prompted several members of the public to call the emergency services.
Alpazan Duven, a Turkish journalist based in the restaurant's building, said: "I was sitting in the office when me and my chief start coughing and I said this was something really dodgy.
"I looked out of the window and saw people rushing and then we heard the sirens."
Supranee Yodmuang, the restaurant supervisor, was above the restaurant when she received a phone call from her boss.
"It was about 4pm when I saw the police who were closing off the roads but I didn't know why.
"My boss rang me and said I had to get out of the building because of a chemical attack."
She added: "Because we're Thai, we're used to the smell of chillies."
A Scotland Yard spokesman said: "The street was closed off for three hours while we were trying to discover the source of the odour."
BBC News 24 Wednesday, 3 October 2007, 12:54 GMT 13:54 UK