Verb+ing is not always a continuous form. The verb pattern used here is the following: fancy + verb+ing. It is used when you are surprised. Fancy meeting you here!

It means "imagine". "Imagine seeing you here, my friend!" The implication is that this person is being seen somewhere that the speaker would not expect to find him/her.

Elena has a good point. When a verb is in -ing form, there are two possibilities: - present participle. You recognise this as the continuous form, but remember a continuous form only exist with some form of "to be". This form needs to be connected with another part of the sentence to function. - gerund. This form allows the verb to act as a noun, and even affect the whole clause. That is, the whole chunk of the sentence is treated as a thing. This is the form your example uses, and we can tell because the gerund follows a transitive verb. What do you fancy (imagine)? [Seeing you here]. There will never be any confusion between the two forms, because they are treated very differently in a sentence. Gerunds and participles used to have separate spellings because of their different origins, but modern English just uses the -ing ending. Soz 'bout that.