Firefighters responded just before 10 p.m. to the unit block of South 55th Street, where witnesses reported heavy flames coming from the first floor of a home.
Residents on the block said they heard a woman screaming from a second-floor window that her daughter was trapped inside.
The young girl was rescued by firefighters and taken to an area hospital, along with her sister and grandmother.
"They had to come out the window my little 3-year-old. They went in and found her and rescued her," said the girls' grandfather, Michael Hills. "I just thank God because it could've been worse."
Hills says his 3-year-old and 7-year-old granddaughters are on ventilators suffering from smoke inhalation. A fourth victim, identified as an adult, was hospitalized in stable condition.
"I had to catch two people from the window," said neighbor, Anthony Hardaway.
Hardaway lives in an apartment in the building. He says he caught the grandmother and the 7-year-old as the jumped from the second floor. But the 3-year-old was still trapped.
"The other one they couldn't get to. It got too bad and the fire department had to go inside and rescue her. It was a horrible horror movie," he said.
Neighbors described seeing heavy flames from the first floor. The family says the grandmother is also in the hospital with minor bruises.
Seven people have been displaced and are being assisted by the Red Cross.
A Philadelphia Water Department crew is also responding to a possible water main break at S. 55th and Ludlow streets, half a block from where to fire occurred.
The call was received at around 3 a.m. about water flooding into the street.
A crew returned Thursday morning to begin digging to determine where the break occurred.
The cause of the fire remains under investigation.