Lascar volcano, which sits in the Andes, rumbled into action on Saturday, triggering minor earth tremors.
No damage in the surrounding area has so far been reported, but an initial green warning was raised to yellow.
Chile's National Geology and Mining Service (Sernageomin) defines "yellow" as meaning a volcano is unstable.
The classification also means experts are monitoring a site for minor explosions and appearances of smoke, according to Sernageomin.
Residents of Talabre, Antofagasta, a small town less than 12km (7 miles) from the volcano, first noticed some activity at around midday.
Despite the giant cloud of smoke that Lascar emitted - comprising volcanic ash and hot gases - no homes are thought to have been damaged. Authorities have set up a no-entry perimeter 5km from the volcano's crater.
Lascar, in the north of the country, is 70km from San Pedro de Atacama, a popular tourist destination for trekking and visits to the Atacama Desert, the driest place on Earth.