President Michelle Bachelet interrupted a speech in the capital to announce that "the volcano is exploding, so a total evacuation of the town of Chaitén has been ordered."
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Rains following the eruption have carpeted surrounding areas in ash and mud. Hard hit is Chaitén, a small provincial capital of wooden houses and cobblestone streets just six miles (ten kilometers) from the volcano in southern Chile.
More than 4,000 people had fled earlier and the few remaining residents were being transferred to two navy ships.
Palena province's governor, Fernando Aguilar, said some people were resisting, but "everybody must leave."
Following 9,000 years of slumber, the volcano's five-day eruption has sent a thick column of ash into the stratosphere, streaming across Patagonia to the Atlantic.
Carmen Fernandez, head of Chile's Emergency Bureau, said the final evacuation order covers 300 people, including police, soldiers, emergency personnel, a few reporters, and some residents.
Fernandez said the amount of lava emerging from the volcano "is very small and very thick, so it is moving very slowly."
Authorities were also evacuating the ash-coated town of Futaleufú, about 75 miles (120 kilometers) east of Chaitén near the Argentine border. Many people there wore surgical masks or cloth across their mouths to guard against the gritty ash.
Officials in Argentina also reported ash fall over wide areas in the southern part of the country.