Gardai swooped on the premises near the border town of Dundalk early on Sunday morning.
Thousands of pirate videos and CDs were found in the raid.
When police entered the premises, three machines, each with the capacity to copy 24 CDs simultaneously were functioning.
The operation is being linked to the Real IRA, the dissident republican paramilitary group responsible for the Omagh bombing in 1998 in which 29 people were killed.
Security sources said the building was being used as a factory for producing counterfeit goods to be sold at open air markets on both sides of the Irish border during the last few days before Christmas.
Ambush
The counterfeiting operation was being directly connected to an incident on Wednesday, when devices to convert agricultural diesel into fuel suitable for black market sale to motorists.
Dissident republicans then held up gardai at gunpoint and stole the devices back.
A man in his 40s, understood to be originally from Northern Ireland, was arrested at the scene of the find and was being questioned under the terms of the republic's anti-terrorist legislation.
Two other men have also been arrested and are being questioned.
Gardai believe the Real IRA, along with other dissident republicans, was planning to use cash earned through the sale of fake computer and Playstation games to fund terrorist attacks.
A senior detective said: "We believe this morning's development amounted to a serious blow to the organisation's plans."