A total of 100 homes were cleared after the fire broke out after 04:15 GMT with 10 fire engines called to the scene.
Fire crews later had to withdraw as part of the Cardwell Street building collapsed in the intense heat.
The heat could be felt more than 1,600ft (500m) away after the fire broke out on the top floor of the mill.
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The four-storey building, called Maple Mill, was hit by fire three months ago.
Greater Manchester Fire and Rescue Service confirmed it would be investigating the cause of the blaze.
The fire service declared the blaze as a "major incident".
Witnesses saw flames leap up to 200ft (60m) and said the front of the building had collapsed.
The fire service's area manager Warren Pickstone said: "Tyres are also involved in the fire so it's emitting a thick acrid smoke."
There are not thought to be any casualties but local residents have been advised to keep their doors and windows closed.
A emergency "rest centre" has been set up by Oldham Council in the nearby Honeywell Centre for those residents evacuated from their homes.
Eyewitness Sarah Jones told the BBC: "I was woken by two loud bangs that I thought were gunshots but they were explosions."
BBC Radio Manchester presenter Mike Sweeney, who was at the scene, said: "It has lit up the whole sky.
"It is just an incredible sight - like movie special effects.
"You can see it from miles away."
Hundreds of people have been evacuated from their homes as 80 firefighters tackle a huge fire at a former paper mill in Oldham.