The wildfire near Coles Bay Road at Friendly Beaches sparked an emergency warning on Tuesday afternoon and has since burned about 700 hectares fanned by strong winds.
It was downgraded to watch-and-act level on Wednesday, with authorities confident they could get on top of the blaze in cooler conditions.
Residents and campers were forced to evacuate, with many spending the night about 20km south at Coles Bay - the gateway to the picturesque Freycinet National Park and peninsula.
The town's boat ramp was a designated safe place.
"I accept that people were uncomfortable overnight," Tasmania Fire Service deputy chief officer Matthew Lowe said.
"I'd much prefer people sleeping in their cars at a nearby safer place than being on the road when trees are falling down.
"The fire crossed Coles Bay Road over a three-and-a-half-kilometre front ... very dangerous conditions."
Coles Bay Road, the only route in and out of the town, remained closed to the general public on Wednesday afternoon.
Some residents have been allowed to pass with a police escort but the road won't be fully reopened until a safety inspection has been completed and hazards removed.
Greg Ross, owner of Freycinet Air Tasmania which is situated between Coles Bay and the fire, chose not to evacuate but said he experienced a nervous night.
"You had a good glow (from the fire) ... but the wind seemed to keep it on the right side of things. It could have been a lot worse," he said.
"It was some of the strongest winds I've experienced around here. It was getting real gusty, where the walls were shaking.
"It is a bit of an eye opener for the (bushfire) season that's for sure."
Gusts of more than 100km/h an hour were recorded in the area.
More than 700 properties at Coles Bay were without power on Wednesday morning because of fallen lines.
There have been no reports of property damage or injuries, with the cause of the fire under investigation.
About 3mm of rain fell on the fireground on Tuesday night, helping to dampen fuel loads.
10°C