By Ivan Alvarado

CASTRO, Chile, May 3 (Reuters) - Chilean authorities were evacuating the last of thousands of residents from the vicinity of a volcano in southern Chile on Saturday, as it continued to spew fine ash for a second day after a surprise eruption.

Around 3,900 people have been evacuated from the Patagonian town of Chaiten and its surroundings since Friday, with another 500 waiting for boats to take them to the town of Castro on the island of Chiloe, slightly further north and Puerto Montt on the mainland.

Some are staying in guesthouses, while schools have been turned into makeshift shelters packed with stores of bottled water after the ash contaminated ground water supplies.

Technicians were dispatched to restore phone lines in and around Chaiten and ensure electricity supplies, while experts took water samples.

"The volcanic activity is continuing, with fine ash falling in the area," the National Emergency Office, ONEMI, said in a statement. It said visibility remained poor, with ash clouding the skies, and that the smell of sulfur hung heavy in the air in some places.

"Today another 500 people will be evacuated (by boat)," it added. "Once complete, the whole town of Chaiten will have been evacuated." Southern Chile is fragmented into hundreds of small islands and fjords.

Some residents wore white surgical facemasks to avoid inhaling the ash -- which in some areas lay 6 inches (15 cm)deep.

Snow-capped Chaiten volcano, which is around 3,280 feet(1,000 meters) high and lies around 6 miles (10 km) from the town of the same name, erupted on Friday, triggering earth tremors and spewing a cloud of ash 2 miles (3 km) into the air.

Ash has caked the picturesque Patagonian town, which lies 760 miles (1,220 km) south of the capital Santiago.

Schools were closed in the area on Friday, and hospitals treated people for irritated eyes and breathing difficulties.

Across the nearby border in Argentina, authorities in Chubut province on Friday asked residents to avoid rubbing their eyes and to wear glasses and long sleeves to avoid ash making contact with skin.

Chile's 2,000 volcanoes include two of Latin America's most active -- Villarica and Llaima. Scientists say some 500 are potentially active.

Llaima, about 435 miles (700 km) south of Santiago, erupted on New Year's Day, spewing ash and molten lava and forcing dozens of tourists and staff to evacuate a wilderness park.

It also belched ash in February and lava crept down its slopes. (With reporting by Manuel Farias, Writing by Simon Gardner, Editing by Sandra Maler)

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