It began at about 21:15 GMT on Tuesday in Loddon Road, Ditchingham, Norfolk.
The woman was found dead in her living room, where the blaze broke out. Neighbours tried to break in but were beaten back by flames.
"The windows were exploding and flames were shooting out of everything - it looked like a horror movie," neighbour Carol Buggs said.
"You couldn't see out or bear to breathe."
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Norfolk Police said a cordon was in place at the house and officers were working with the fire service to investigate its cause.
Fire crews said the blaze spread rapidly around the 100-year-old home.
Fire spokesman Roy Harold said: "The smoke... was very thick and pouring out of the property.
"There are smoke alarms inside but they've been damaged by the fire so we need to check whether or not they operated."
Carol Buggs and her husband Sidney were alerted by another resident in Loddon Road when the terraced cottage next to theirs was well alight.
They said had the blaze broken out in the small hours they could have "burnt alive in our own beds".
Another neighbour, Jonathan Robinson, who lives three doors away, said he found a side door open but decided not to enter after being met by "thick acrid smoke".
"I feel sorry for [the victim] and for the people who live next door," he said.
"They had no idea at all and if my wife hadn't gone round and knocked on the door and told them to get out of the house... they could have been quite seriously injured as well."
A house fire that killed an elderly woman was like a scene from a "horror movie", a neighbour has said.