The Times of London reports Chalemchai Tangjariyapoon, who works at the Thai Cottage restaurant in the Soho entertainment district, was dry-frying bird's eye chillies as he prepared a huge batch of nam prik pao, an extra-hot dip served with prawn crackers.
The smoke from the kitchen drifted out in the street, creating an acrid cloud which sent shoppers spluttering for cover and prompted police to seal off several streets and evacuate homes and businesses.
The scare comes with Britain facing a severe threat of terrorist attack, according to security service MI5, and following foiled car bombings in London and Glasgow in June.
Restaurant staff, who are used to the pungent aroma, were baffled when firefighters broke down their door.
"I can understand why people who weren't Thai would not know what it was," the chef told the paper.
"But it doesn't smell like chemicals. I'm a bit confused."
Waitress Supranee Yodmuang added that she and other staff were led out of the restaurant by firefighters and had to wait in the street for three hours.
"They said there was a chemical smell and I remember saying to someone that maybe the smell was the chillies, but then we said that that was not possible," she said.
"The restaurant has been here for 17 years and this has never happened before."
The chef was cooking about four kilograms of dried chillies at the time.
A spokesman for London's Metropolitan Police confirmed the area had been closed off for several hours while they discovered the source of the smoke, while the ambulance service sent a hazardous area response team to the scene, The Times said.