Akshay Phale, then 27, was working at the rear of a machine at Farnbeck at its Leith premises when the incident happened on 5 June 2012.
Edinburgh Sheriff Court heard that Mr Phale was attempting to wrap cotton fabric around a rotating wooden cylinder on a machine that is then used in the security printing industry worldwide for the printing of paper money.
As he carried out his task, a nearby colleague heard a scream. He shouted to another worker to shut everything down and ran to Mr Phale's aid. He saw his colleague's arm had been entangled between the rotating cylinder and the wrapped fabric.
Mr Phale was unable to release his fingers due to the tension of the fabric around the cylinder. As the cylinder was rotating it pulled his hand around it, causing his forearm to become trapped. The fabric was cut to ease the tension, but he was trapped for almost an hour until other employees, together with the fire service, were able to disconnect the motor and release his arm.
The injured worker was taken to hospital where he underwent several operations over a 17-day period, including the amputation of his right forearm below the elbow. He required several months of physiotherapy and has sustained permanent scarring on his back, arm, leg and right hand. He has not yet been able to return to work.
An investigation by the Health and Safety Executive (HSE) found that the practice of allowing the cylinder to continue to turn when the wrapping process was being carried out had been in place at the firm for over 30 years. However, for that entire period the risk to employees of having their fingers, hands and clothing caught within the mechanism had not been identified.
Consequently no measures were put in place to minimise the risk or to change the systems of work.
Farnbeck, of Swanfield, Old Bonnington Road, Edinburgh pleaded guilty to breaching Section 2 of the Health and Safety at Work etc Act 1974.
HSE inspector Hazel Dobb said: "This incident was entirely foreseeable and therefore entirely preventable. Where an employee is able to gain access to dangerous moving parts, there is a risk of injury.
"Farnbeck Ltd should have identified the risk posed to workers on this particular machine and made sure the rotating cylinder was switched off prior to employees coming into close contact with it.
"This unsafe practice had been carried out for many years and it is fortunate that there have been no other serious incidents as a result.