This is a pivotal quote from Wiesel's memoir. When Elie watches live infants being thrown into the ovens, those literal flames become figurative ones which destroy his religious faith. Elie is incredulous that his God could allow innocent babies to meet such a horrible fate. If God would allow that, Elie questions why he would even be faithful or believe in such a God. From this point on, Elie struggles even to make a show of faith. When other prisoners celebrate Jewish holidays, Elie cannot do so, especially not with sincerity. Instead of remaining an innocent young man whose faith was so strong in Chapter 1 that he was willing to accept the more mystical side of his faith, he has become a cynic--someone who blames God for every awful event that occurs after he witnesses the infant scene.
The quote also continues the flame motif that Wiesel begins in Chapter 2 with Madame Schachter. If you have not read past Chapter 3, look for instances where Elie refers to fire, flames, smoke, burning, etc. By the end of the memoir, you will be able to see what all those references mean.
When Elie saw the jews being dumped into pits of fire, he didn'tunderstand why his God would let such horrible things happen to his people. He thought it wasn't right for the jews to be killed in such horrific ways. And as one by one the jews were being killed, part of his religion was being destroyed, as the flames consumed their faith.