They are being sheltered in guesthouses and schools.
Continued volcanic activity
Carmen Fernandez, director of the National Emergency Office, said that volcanic activity was continuing with ash falling.
"We don't know what is going to happen because ... volcanic eruptions are a little erratic and we have no recent historical record of eruptions of this volcano."
Thousands of residents have been
evacuated to other regions [AFP]
The volcano - itself called Chaiten - initially shot a cloud of ash 3km into the air.
The surrounding area, including the town which is 10km from the volcano, was covered in centimetres of ash.
The ash spoiled the community water supply forcing authorities to shut it off and provide alternative provisions in tankers and bottles.
Visibility remained poor as ash clouded the skies and the smell of sulphur hung in the air.
During a visit to the area Edmundo Perez Yoma, the interior minister, said: "We have completed the first phase of the operation, which was the evacuation of practically all of the local population.
"We don't know if this is a situation that will last days, or weeks or even more."