One of the benefits of a starship as opposed to an ocean-going ship is that it operates in a vacuum. There are fires on your ship, get the crew into shuttles, and open the ship's interior to space. Fire is snuffed out. Return crew to ship. Repair ship. Transmit a message to Starfleet requesting aid. Starfleet sends a relief ship.
So, we return full circle to these questions, what exactly did happen aboard the Stargazer? Why did Captain Picard abandon his ship?
Well, there are a lot of possibility that can happened that time (although maybe it was only because of plot hole / bad writing)
Maybe they brought dangerous alien lifeforms on board, or virus or something that released when the fire spread out, so Picard didn't has any choice beside abandoning the ship.
One thing that I don't understand, why Picard didn't push the self destruct button when it was happened? Or maybe he did it, but the system didn't work because the ship was old. Well, I don't know, lot of old system didn't work just like it suppose to be I think.