The factory was found during searches at a disused premises at Tower Street on Wednesday.
It has been dismantled and items have been taken away for examination.
Meanwhile, police said three people were arrested after a search at Tower Court led to the seizure of ammunition and fireworks.
PSNI Chief Inspector Mark McEwan said: "These seizures are significant and are a clear indication of our ongoing commitment to working with local communities to keep them safe.
"There has been an increase in tensions at the interface, following a number of incidents that have occurred in both communities, over recent days."
The discovery comes after a period of heightened tensions at the east Belfast interface.
Reports have been made of petrol bomb attacks on either side of the peace wall, affecting residents in areas including the Short Strand and Cluan Place.
Welcoming the find, East Belfast DUP MLA Robin Newton said: "This discovery will build on on-going efforts of local community workers who are prepared to engage across the divide to maintain peace.
"Now is a time for responsible behaviour, calm words and cool heads to help protect those residents who live along both sides of the interface."
Local Sinn Féin councillor Niall Ó Donnghaile also welcomed the news.
"While a find of this nature will no doubt give many cause for concern, I welcome the fact that they have been taken off the streets," he said.
"It is vital that all residents at the interface are given this kind of reassurance.
"I would again call on everyone to show their support for residents living at the interfaces and call on those determined to cause trouble to heed their calls and stay away."
Police asked anyone with further information to come forward.