SHANGRI-LA, Yunnan, Jan. 13 -- The smell of ash lingered over a snowy ancient town in Shangri-la, a famous tourist site in southwest China, on Monday.

As many as 300 homes were destroyed in the 1,300-year-old Tibetan town of Dukezong in Yunnan Province on Saturday after its worst fire in its history. More than 2,600 residents have been relocated.

"I grew up here. I am heartbroken at the sight of such a beautiful ancient town being turned to ash," said Li Gang, director with the Cultural Relic Management Institute with the Deqen Tibetan Autonomous Prefecture.

"This is a warning to us about protecting and conserving the town and its traditional culture," he said.

Once a hub along the ancient Tea-Horse Road, Dukezong was built according to "Shambhala (heavenly realm)" in Sutra and named in Tibetan as the "Town of Moonlight".

It became famous thanks to British writer James Hilton's 1933 novel The Lost Horizon, which describes a journey in the mythical land.

In 2001, the region was renamed Shangri-la County and is on the southern edge of Qinghai-Tibet Plateau and borders Yunnan, Sichuan and Tibet.

At 1:37 a.m. on Saturday, a fire at Ruyi Inn, a wooden construction, broke out. The inn was in the middle-lower section of the mountain town.

"At around 2 a.m., my sister called me about the fire. I quickly woke up the six tourists in the inn," said waitress Arongmi.

They all escaped before the inn was turned to rubble.

"The fire spread and the whole town was engulfed. The sky was lit red and wooden homes crackled in the flames," said Song Yunfeng, a 20-year-old native Tibetan girl.

Song wandered around the local square, the heart of the town, which holds trade fairs and major festivals.

Inns, cafes, souvenir shops and dwellings in the "Town of Moonlight" were rubble.

"Most of the jewelry and antique souvenirs melted," said Li Peiji, the owner of a store selling silver.

Searching for the remaining goods in the snow-covered ruins, Li said that his losses were estimated to be over one million yuan (about 165,400 U.S. dollars).

Dukezong was designed in a way to prevent it from being destroyed by fire. When it was initially built there was space and water between buildings to prevent fire from spreading.

"However, a lot of spare space was used for restaurants, shops and inns as tourism boomed," Li said.

Hubei tourist Tan Fengfan was left devastated after arriving in the town late on Monday.

"We learnt about the fire in the news. But we decided to come to Shangri-la and see," said Tan.

"I am expecting the town to be reconstructed," he said.

Dukezong is an important part of Shangri-la, home to the Meri snow mountain, a grand canyon and beautiful landscape, said Wang Guohua, a county official of Shangri-la.

"I hope people will still come to Shangri-la," said Wang.