Yeah, that's pretty bad and I'm going to wager that it's a bacterial problem. I definitely recommend treating it manually, so a little anaesthetic to knock out the fish, some hydrogen peroxide or a 7.5% betadine solution to clean out the wound, and then bio-bandage or neosporin to protect and promote healing. Apply with a soft paper towel so you don't get q-tip or cotton ball threads in the wound.
It could be one of many bacterias, so I think the best bet for tank treatment is a Maracyn/Maracyn 2 regimen. Since they are broad-spectrum antibacterials, they should effectively deal with whatever bacteria is causing the problem.
You may want to isolate the affected fish in a quarantine tank or with a divider to keep the other fish from bothering the wound.
Best of luck! And if you need any further help or instructions as far as treatment, feel free to ask. I can provide details
You can read a little more about bacterial problems like the one I suspect your fish has here:
http://www.vet.uga.edu/VPP/Undergrad/Siegel/index.php
It's meant for scientist-types, but if you can decipher the jargon it's a good read.