Victims ran from the flames clutching their belongings
Several people were injured when fire engulfed the makeshift settlement on the top of several three and four storey apartment blocks, in the fourth fire in squatter communities since November.
Phan Pheang, police chief for Don Penh district, said the homes of about 235 families living in shacks built on top of the buildings had been destroyed.
"We have nothing left," 45-year-old Din Lang told the Associated Press news agency as she lay on the ground weeping.
"We only had time to bring ourselves downstairs," said her sister Din Phoeun, a 41-year-old seamstress.
Injured victims
Mr Pheang said one policeman had been hurt by falling debris and a boy had been injured when he slipped and fell.
A medical emergency worker told the French news agency AFP that several people had suffered burns and inhalation injuries.
Another senior policeman said the fire, which started at around 0900 local time (0200 GMT), had been caused by an electrical short circuit in one of the wooden shacks.
Thousands of squatters live in roof-top settlements in Phnom Penh to avoid the city's high rents.
Phnom Penh deputy governor Trak Thayseang said the first priority would be to find food and shelter for those left homeless by the fire.
They will not be allowed to rebuild homes on the same site.
"We will care for these victims and look for new homes for them outside of Phnom Penh where we can find them a piece of land," he said.
Squatters at risk
The country's shantytown dwellers have been hit hard by fires in recent months.
In January, a fire destroyed a riverside shantytown in the central Cambodian town of Kampong Chhnang, leaving some 1,500 people homeless.
And about 15,000 people, mainly ethnic Vietnamese, were made homeless when fires swept through two squatter camps in Phnom Penh last November.
Residents of the camps have since been given new parcels of land to live on.