The latest eruption has thrown thick clouds of ash into the sky
Chile has evacuated more than 150 people who had returned to the southern town of Chaiten after it was destroyed by a volcanic eruption last year.
Authorities decided to take action after the Chaiten volcano erupted again on Thursday, sending a stream of lava down its slopes.
Authorities say no-one will be allowed to stay in the area, in Patagonia.
But many of Chaiten's 4,500 former residents have resisted government plans to relocate the town.
Deputy Interior Minister Patricio Rosende said the volcano had seen "a significant resumption of activity".
"Our security team has observed an increase in the size of a column of ash and smoke, with a deformation to one side," he said.
"That leads us to presume that there is a collapse of one of the cones. This is more proof of the imminent risk in the area. It is a time-bomb."
The volcano, which is 10km (6 miles) from the town, had been dormant for 9,000 years before last May's spectacular eruption.
Vast clouds of smoke and ash soared more than 30km into the sky, as the debris reached neighbouring Argentina and disrupted flights.
At the time, officials said the volcano's two craters had fused, helping ease pressure.
The Chaiten volcano started erupting again in 2008
But a government expert on volcanoes warned there could be a big eruption at any time.
"There could be a major explosion that could collapse the volcano's cone," said Luis Lara of the National Geologic and Mining Service.
Sitting on the edge of the South American and Nazca tectonic plates, Chile is in one of the most volcanically active regions on Earth.
Experts say that about 20 of its more than 100 active volcanoes are in danger of erupting at any time.
Chaiten is 1,220km south of Chile's capital, Santiago.