A large chemical explosion triggered a blaze at the Derrimut factory which then engulfed the building located at an industrial park west of the CBD.
There are no reports of injuries and it's believed everyone inside the factory evacuated safely, Victoria Police said.
Fire Rescue Victoria has said hazardous material and unknown toxins are burning.
Emergency services were called to the fire at the Swann Drive address at about 11.20am on Wednesday.
A watch and act alert has been issued for the fire affecting thousands of residents and workers in Albion, Braybrook, Brooklyn, Derrimut, Laverton North, Sunshine, Sunshine West, Tottenham and Truganina.
"Wind is blowing toxic smoke towards the east across Derrimut," the alert said.
"Anyone located in the area affected by smoke should take shelter indoors immediately."
A significant amount of back smoke is visible around Derrimut and Sunshine West, due to a factory fire. Motorists in the area, including the Western Freeway and M80 Ring Road, should keep their ventilation on recirculate and windows up. — VicTraffic (@VicTraffic) #victraffic pic.twitter.com/8G8YJFzAcyJuly 10, 2024
Residents away from home have been told not to return while those still in the area told to close all doors, windows and vents.
The factory is located close to a gas pipeline but emergency services have not issued any alerts over the infrastructure.
Last year, a worker died and two others were injured in a fire also triggered by an explosion at a factory on Swann Drive.
Traffic has been diverted away from the area with outbound lanes of the Western Freeway near the factory and Swann Drive closed until further notice.
Drivers in the area have been told to keep their windows up to avoid breathing smoke and have been told not to slow down to see the fire.
Paramedics are also on the scene.
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