An Atari 2600 game called Fire! that supposedly involved setting fire to things first appeared on some of the original collectors lists of unreleased Atari games that began circulating on the net in the late 1990s and early 2000s including this one. I often wondered about this game myself, as it also appeared in the Rumor Mill section of the Digital Press Guide...
No one seemed to know much about the game. I remember contacting Joe Santulli of Digital Press years ago and asking him about it but he had no idea either. I never really believed that the game existed in the first place but I was intrigued and curious enough to want to know how the rumors surrounding this game started. I started digging into this mystery a bit recently after noticing that someone had posted about it here on the forums.
By searching newspapers from 1982-84, I was able to find that the likely original source for the rumored existence of such a game is a snippet from a January 1984 article about collectible and controversial video games that appeared in the St. Petersburg Times (and likely other newspapers as well)...
"Fire! likewise generated protests because the "hero" here had to enter a building, set it afire with kerosene, and then escape before the blazing building collapsed. The game from Palmtex was short-lived."
However, I believe no such game ever existed and the writer of that article was either confused or simply misinformed. The only game resembling this description is a 1982 game released for the Apple II by Muse Software called Firebug that did involve starting fires and likely did generate controversy.
Palmtex was a manufacturer of electronic games that was the original distributor of the Nintendo Game & Watch series of handhelds (including Fire) in North America. The writer of that 1984 article was probably thinking of the game Firebug by Muse but mistakenly identified it as Fire by Palmtex. The rumored Atari game is thus the result of a case of mistaken identity involving memories from two unrelated games being combined into one. Needless to say, collectors can strike this one from the rumor mill.