A raid on a printing works south of Naples "uncovered 1,012,800 bills still in production but already sporting the watermark found on €50 notes," the police said in a statement.
Some of the notes were found in a hidden compartment dug into the floor and opened by remote control, it said.
Three people accused of manning the machines were arrested, along with two brothers believed to be the masterminds behind the operation run in an industrial area between Castellammare di Stabia and Torre Annunziata, south of Naples.
The southern Italian city is a hotbed for counterfeiters, with one of Italy's top investigators, Gerardo Marinelli, saying in September that "over 50 percent of all fake notes in the eurozone come from the Naples hinterland."
The most renowned counterfeit organization is the so-called "Napoli Group", which runs a "school" for foreigners in how to make false euro banknotes, he said.
According to Naples prosecutors, despite suspicions of links between the group and the notorious Camorra mafia syndicate, they have yet to uncover any proof.