The San Cristobal volcano has spewed out a column of ash and gas two and a half miles high, leading Nicaraguan authorities to evacuate about 3,000 people from nine communities around the country's tallest mountain.
Residents reported hearing three powerful explosions in the volcano as the cloud began billowing skyward and ash drifted over nearby villages.
"This activity could affect some 500 families totalling 3,000 people, so we decided to evacuate them," said Guillermo Gonzalez, executive director of the government's disaster agency.
Civil defence personnel said 300 soldiers were sent to evacuate people and care for them.
Javier Mejia, director of Nicaragua's geological institute, said monitoring instruments showed "strong activity" in the volcano.
"We do not rule out anything, but call for calm," he said.
The 5,740-foot volcano sits 87 miles north west of Managua, the capital. It has been active since 1520, Mr Mejia said.
Nicaragua has been on alert since a strong earthquake shook neighbouring Costa Rica and then a swarm of 17 minor tremors were recorded in the area around Lake Managua next to the capital the following day.