The fire was reported at about 04:50 GMT, according to West Yorkshire Fire and Rescue service.
John Holmes, who lives nearby, said the noise of the roof bursting into flames and the floors of the mill collapsing woke him up.
Ian Bitcon, from the fire service, said it was "a very substantial and established fire".
The service would be present at the site for the rest of the day, he added.
Det Insp Mark Walker urged anyone who saw "suspicious activity" in the area to contact West Yorkshire Police.
A fire service investigation is under way and has already provided police information about suspected arson.
Ruth Street, in Newsome, Huddersfield, is still closed.
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The mill was founded in 1827 and was a working woollen textile mill until 1983, according to the Newsome Mills campaign.
Witness Josh Edwards said some nearby houses had been evacuated and the Hillside Primary School announced on its website that it would be closed.
A blaze that tore through a four-storey former textile mill in Huddersfield was "suspected arson", police have said.