Big Rick Stuart

The date was December 4th 1971.

During the show a "stupid" with a flare gun really did shoot off a flare gun inside and the rattan ceiling caught fire.

But some stupid with a flare gun
Burned the place to the ground

It happened during a synthesizer solo and from a Zappa bootleg "Swiss Cheese / Fire" here at 1:20 in you can hear the band stop and Frank asking the crowd to please leave. "Go towards the exit ladies and gentlemen, calmly"
 

Deep Purple saw the fire from their hotel room and as the song famously continues it was

Smoke on the water
A fire in the sky

It could have been much worse.

Funky Claude was running in and out
He was pulling kids out the ground

While the Casino and Frank Zappa's equipment burned nobody died. The "Funky Claude" running in and out is referring to Claude Nobs, the director of the Montreux Jazz Festival who helped some of the audience escape the fire.

Now Deep Purple had to change their plans and find a new place to record the songs for Machine Head. As they say "Swiss time was running out." Clever line!

When it all was over
We had to find another place
Swiss time was running out
It seemed that we would lose the race

They went to the ironically named Grand Hotel. It was empty for the season and they arranged the bed mattresses on walls and set things up in various rooms to finally record.

Deep Purple guitar god Ritchie Blackmore says

We had the Rolling Stones' mobile recording unit sitting outside in the snow, but to get there we had to run cable through two doors in the corridor into a room, through a bathroom and into another room, from which it went across a bed and out the veranda window, then ran along the balcony for about 100 feet and came back in through another bedroom window.

It then went through that room's bathroom and into another corridor, then all the way down a marble staircase to the foyer reception area of the hotel, out the front door, across the courtyard and up the steps into the back of the mobile unit.

I think that setup led to capturing some spontaneity, because once we got to the truck for a playback, even if we didn’t think it was a perfect take, we’d go, 'Yeah, that’s good enough.' Because we just couldn’t stand going back again.
 

As the song ends all is well.

Few red lights and a few old beds
We made a place to sweat
No matter what we get out of this
I know, I know we'll never forget, now

Smoke on the water
A fire in the sky

The album Machine Head was released in March 1972 and reached number 1 in the United Kingdom and stayed in the top 40 for 20 weeks. It reached number 7 in the United States, remaining on the Billboard 200 for 118 weeks.

The song is honoured in Montreux by a sculpture along the lake shore (right next to the statue of Queen frontman Freddie Mercury) with the band's name, the song title, and the riff in musical notes.

One more thing. All those kids playing the Smoke On The Water riff in guitar shops all these years are probably playing it wrong! Ritchie and the band explain here.