The volcano erupted twice in the space of a few hours.
Chile’s Onemi emergency office declared a red alert following the sudden eruption at around 18.00 local time, which occurred about 625 miles south of Santiago, the capital, near the tourist towns of Puerto Varas and Puerto Montt.
Footage from the area shows a huge column of lava and ash being sent several miles into the air.
More than 4,000 people have been evacuated within a 12 mile radius.
The Calbuco volcano is one of the most active in Chile, but its eruption took officials in the area by surprise.
Alejandro Verges, an emergency director for the region, said Calbuco had not been under any special form of observation.
The inhabitants of the nearby town of Ensenada – along with residents from two other smaller communities – have been ordered to evacuate their homes.
Schools in the area have been shut and some flights cancelled.
The nearby city of Puerto Montt – a gateway to the popular Patagonia region – has already been blanketed in a cloud of ash.
TV footage showed traffic jams in the city and long queues at petrol stations. The nearby town of Puerto Varas was also under a state of alert.
Mayor Gervoy Paredes said residents were “very, very frightened”.
Interior Minister Rodrigo Penailillo called on people affected to “remain calm and stay informed”.
Neighboring Argentina has also put emergency measures in place for the city of Bariloche – about 65 miles from Calbuco – where ash clouds are expected.
Residents there have been warned to stay indoors.
Chile has the second largest chain of volcanoes in the world after Indonesia, with about 500 that are potentially active.
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