The fire at Peak Environmental Recycling Plant on the Clooney Road broke out before midday on Tuesday.
Sixty firefighters have been involved in tackling the fire at several buildings on the site and a 200 metre exclusion zone was put in place.
"The buildings contain large quantities of plastic and cardboard and diesel are also involved in the incident," said a Fire Service spokeswoman, who added it is too early to determine what caused the blaze.
Although the building was also thought to have contained a number of gas cylinders, the Fire Service later discovered there were no acetylene cylinders at the site.
There are currently three fire engines and 14 firefighters at the scene of the now deep-seated fire, after crews attempted to bring the blaze under control throughout the night.
Fire and Rescue Service Station Commander Jonathan Tate said an assessment on whether to scale the operation up is due to be made, so that they can attempt to extinguish the fire during the day.
Brenda Stevenson, a local SDLP councillor said bringing the fire under control was "a very very dangerous operation for anybody involved".
"We have to pay tribute to all those firefighters who went down and risked life and limb to try and bring this very serious fire under control," she said.
Residents have been advised to keep their windows closed because of smoke pollution in the Clooney Road, Cloghole Road, Kilnappy Road and Strathfoyle areas.
A spokesperson for the Department of Environment said the local waterways had been checked and were not polluted as a result of the plant fire.