All 11,000 residents on Ambae island have been ordered to leave and will be moved to other islands in the Pacific State.
Government spokesman Hilaire Bule said ministers decided they could not risk people’s lives.
He said the residents will be moved onto nearby islands.
The Manaro Voui volcano has been rumbling for days, but began spewing ash in a “moderate eruption” over the weekend.
Dickinson Tevi, a spokesman for the Vanuatu Red Cross Society, said the relief agency has been shipping water and shelter equipment the island.
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He said: “People are quite afraid with the sound of rumbling going on.
“They are very uncertain and afraid.”
Ambae resident Lilian Garae said she could see “smoke coming from the hills” and hear regular coming noises from the volcano.
Officials moved 6,000 residents to shelters elsewhere on the island this week, but have now ordered everyone to leave.
The compulsory evacuation is expected to be completed by next Friday, in what emergency officials said would be a first for the country.
Mr Bule said the Government had allocated 200 million veto (£1.42 million) towards evacuation the island.
He said: “We’ve prepared for cyclones by putting evacuation centers on the island but we are not ready for a volcanic eruption.
“The government has to put a policy in place to cater for this in the future.”
Ambae is one of of about 65 inhabited islands in the Pacific nation and about one-quarter of the way from Australia to Hawaii.
Authorities raised the activity measure of the volcano to the second highest level on Saturday, Level 4, on a scale of which Level 5 represents a major eruption.
The volcano has been seen releasing clouds of smoke with signs of hot lava emerging to the surface in its crater in recent days.
Vanuatu is home to about 280,000 people and is prone to natural disasters and sits on the Pacific’s “Ring of Fire” – where earthquakes and volcanoes are common.
Manaro Voui last erupted in 2005, forcing about 3,300 people to flee their homes.