The accident took place when fuel from a car doing burnouts caught fire and sprayed into the crowd.
Footage from the event shows people hurrying to get out of the way as the flash fire hit onlookers.
The incident took place at the Red Centre NATS competition at the Alice Springs Inland Dragway in central Australia.
Event organisers said one patient was in a critical condition and the remaining 11 were in a serious but stable condition.
"This is a distressing situation; however, all patients are receiving the care they need," Red Centre NATS said in a statement.
The remainder of Sunday's competition was suspended by the organisers and police are now investigating the incident.
