More than 100 firefighters battled the blaze on Thursday afternoon after the building was evacuated.
The seven-storey building's roof collapsed then the floors, as thousands watched on.
Helicopter footage from Nine News showed the Surry Hills factory well alight between Randle Street and Randle Lane, near Central Station in Surry Hills.
"The building is currently totally engulfed in flames," a NSW Fire and Rescue spokesman told AAP.
"We don't know what's caused it ... we're working to contain the source but it's threatening adjoining buildings."
Some 25 fire trucks and more than 100 firefighters are at the building working to contain the blaze.
No casualties have been reported.
Fire crews were spraying the building from the street and from aerial ladders.
Neighbouring apartments in the densley populated area were also being doused with water to protect them.
Footage showed walls collapsing and a vehicle on fire nearby.
Neighbouring streets and laneways have been closed as a dark plume of smoke was visible across the central city.
Locals were urged to stay away from the area and listen to advice from police and firefighters.
"Terrible fire in Surry Hills in my electorate. Please stay safe and listen to instructions from emergency services," local MP Tanya Plibersek wrote on Twitter.
"Thanks to Fire and Rescue NSW, who are on the scene working to get it under control."
Surrounding streets were closed but trains continued to run from nearby Central Station.
18°C