The Observatory issued the alert at 9:10 a.m. following the issuing of an amber rainstorm warning, which indicates more than 30 mm of rain is anticipated to fall within the next hour.
The weather observatory said the storm would pass within 100 kilometres of Hong Kong Wednesday morning, "posing a considerable threat" to the territory.
Schools were closed, flights cancelled, and public transport widely affected as the storm hit the city.
At 6pm, the typhoon was estimated to be about 410 kilometers east-southeast of Hong Kong, and is forecast to move west-northwest at about 25 kilometers per hour towards the coast of Guangdong. Sea water flooding could also occur in low-lying areas.
Cathay Pacific Airways said on Twitter that a "majority of flights departing and arriving" into the city between 6 a.m. and 5 p.m. on Wednesday are canceled.
Cathay said wind speed and direction was "severely impacting flight operations" in a statement on its website, although it added operations remained normal Tuesday night.
Typhoon Hato - named after the Japanese word for pigeon - churned towards the city yesterday, and widespread flight cancellations were expected at Hong Kong's worldwide airport.
Local MTR trains will only provide limited services during a No. 9 signal while overground rail and bus services will be fully suspended.
The warning forced businesses, government offices, schools and courts to shut and the stock market to suspend trading, leaving the Asian financial center's normally bustling streets eerily quiet. Trading will be suspended for the whole day if the storm signal is at 8 or higher at noon.