Manam Island, just 10 km (6 miles) wide, is one of the Pacific nation`s most active volcanoes and is home to roughly 9,000 people.
Three villages were directly in the path of the lava flow and residents had to be evacuated to safer ground, Martin Mose, director of the PNG National Disaster Centre, told Reuters by phone.
The Rabaul Volcano Observatory (RVO) reported the eruption began at 6 a.m. local time (2000 GMT Friday), sending an ash column 15 km (50,000 feet) above sea level.
The ash falls were so heavy that trees broke under the weight, the RVO said in an information bulletin.
"The most affected areas are Baliau and Kuluguma and due to the very poor visibility caused by the ash fall, people are using torch light to move around," it said.
The RVO`s Steve Saunders said it was an unusually large eruption.
"There are no casualties as far as we know but we are telling people to keep away from valleys for risk of mud flows ... there`s a heavy thick blanket of ash on the flank and if there is heavy rainfall, we are making people aware of the threat," he said by phone.
Saunders said the initial phase of the eruption was over but a new vent had opened, indicating more activity may be likely.
The Darwin Volcanic Ash Advisory Centre (DVAAC) issued a threat warning to aviation to reroute around the cloud, which was above the cruising level of commercial airlines.
The cloud was expected to dissipate over the next 12 hours, DVAAC meteorologist Amanda Alford told Reuters.
Previous eruptions on Manam have killed residents who breathed in the ash or were buried by landslides, according to volcanic information website volcanodiscovery.com.
Editing by: Mohamad Antoni / Boyke S.