Watched by a small crowd, the front section of the 126-year-old structure - originally the Butterworth building - was slowly dismantled by a mechanical excavator, beginning shortly before 6pm.
The digger quickly demolished the top floor frontage, with old bricks hidden under layers of yellow paint briefly revealed, before disappearing for good into clouds of dust.
Oakley Gray Architects director John Gray, of Dunedin, said demolition would take several days, and was "pretty tricky".
The building had weak brick side walls, but firmer concrete floors, he said.
However, the floors had less sturdy railway irons - rather than larger beams - running through them.
"There's nothing tying the building together... If they start pushing too much on it to demolish it, it would just collapse. The shock wave would be quite dangerous to surrounding buildings."
Instead, contractors were last night taking small pieces off the front of the building to ensure it did not collapse into the street, before dismantling the remainder over the next few days, he said.
Southern Cross Hotel next door had vacated most of its closest wing for the week's demolition work, he said.
The vacant site - together with the already-demolished Bank of Australasia building next door - would be used for a new single-level car park for the Scenic Circle Southern Cross Hotel and Dunedin Casino.
