But the ash cloud created by the eruption continued to wreak havoc on airlines around the world.

The Chilean airline LAN cancelled flights to Temuco and Valdivia in the south of the country, and a number of flights were suspended in Australia and New Zealand.

"Viscous lava has flowed slowly westward in a channel roughly 50 meters (165 feet) wide and 100 meters (325 feet) long," the national geology service known as SERNAGEOMIN said in its latest report.

Last week, SERNAGEOMIN chief Enrique Valdivieso said the appearance of lava would signal "the end of the eruptive process" and would not put any of the local population in danger.

Authorities had subsequently authorized the return of more than 4,000 people to their homes.

But on Tuesday, SERNAGEOMIN acknowledged that "eruptions continue" and that volcanic activity could "increase again."

Puyehue had been dormant for a half century until June 4.

The ash cloud created by the eruption threatened to put an end to the tourist season at the Argentine skiing resort of Bariloche, some 1,600 kilometers (1,000 miles) southwest of Buenos Aires and just 100 kilometers (60 miles) southeast of Puyehue.

Air traffic in the southern hemisphere was hit especially hard, initially paralyzing airports in Buenos Aires and Montevideo, and later those in Australia and New Zealand.

John Lee, chief executive of industrial group Tourism and Transport Forum said the ash had caused the largest disruption to Australia's aviation industry since a pilots' strike in 1989.

Ash poses a significant threat to aircraft because once sucked into engines, it can be transformed into molten glass by the high temperatures and potentially cause an engine to fail.

The eruption of the Icelandic volcano Eyjafjoll last year caused the greatest shutdown of air space in peacetime Europe, with more than 100,000 flights cancelled and eight million passengers affected.

Hundreds of services were cancelled Tuesday in Sydney, Melbourne, Adelaide and Canberra but the threat of prolonged disruption eased as the ash from the Puyehue volcano eruption pushed out towards the Tasman Sea and New Zealand.

"The ash cloud affecting eastern Australia has cleared, and airlines are returning to normal operations Wednesday afternoon," said the Bureau of Meteorology.

But while mainland routes got back in the air, Qantas, Jetstar, and Virgin services to Tasmania and New Zealand were all halted until further notice as the ash moved south.

Qantas restored flights to and from the South Australian capital Adelaide before dawn, followed by Melbourne.

Canberra and Sydney routes were operating again by early afternoon, including international flights, although Qantas said delays were expected on overseas services into both Sydney and Melbourne.

Virgin also resumed flights from the major cities.

Despite planes being airborne, Qantas spokeswoman Olivia Wirth said thousands of customers had been affected once again.

"There were a significant number of people delayed over the past 24 hours. There were around 20,000 yesterday and we expect that number to go to around 50,000 today," she told Sky News.

The airline was putting on extra flights to work through the backlog of passengers, some of whom have been stranded for two days.

"The backlog will take a significant time to clear but we will be looking at putting on as many extra flights as we can," said Wirth. "Fingers crossed, we won't be seeing this again."

Despite other airlines taking a conservative approach, Air New Zealand has maintained most services by flying under the plume, and said its routes continued to operate as normal.

New Zealand Civil Aviation Authority meteorological manager Peter Lechner said the cloud was expected to cover the entire country later Wednesday and due to slow-moving winds would linger for "at least a day or two".

"It will be at a height of 20,000 feet (6,000 metres), which provides plenty of scope to fly under the cloud," he added.

Ash poses a significant threat to aircraft because once sucked into engines it can be transformed into molten glass by the high temperatures and potentially cause an engine to fail.

The cloud first entered Australian and New Zealand airspace over a week ago, causing some airlines to ground all flights to affected areas while others chose to divert under and around the plume.

Australian Transport Minister Anthony Albanese admitted the flight chaos would come at a cost.

"There's no doubt there will be a significant cost to all the airlines, but also an economic cost (to the country as a whole) -- people are not flying into Australia," he said.

"This means lower revenues for the tourism industry."

Australia's Tourism and Transport Forum put the impact on the tourism sector at over Aus$10 million (US$10.6 million) a day, while Qantas said disruptions due to the ash had cost it Aus$21 million even before this week's cancellations.

Qantas chief executive Alan Joyce emphatically denied that the airline had been too cautious in grounding flights.

"It's absolutely worth it. I would spend anything to ensure the safety of every single one of our passengers," he said.