"The victims burned or suffocated to death," regional governor Patricio Zapata said in the port city 1,050 miles north of Santiago.
"They were not able to escape because the door of the dormitory was, of course, closed," he said.
There was no clear motive for the protest at the jail in Iquique, about 1,125 miles north of Santiago. But President Ricardo Lagos put the protest down to overcrowding, which spurred a series of peaceful demonstrations and hunger strikes last year.
A prison spokesman said "there was no attempt by prisoners to break out of the prison. There were no clashes between prisoners and guards."
Two inmates and two guards also suffered light injuries during the riot, which began in the early hours of Monday and continued for around two hours before firefighters brought the blaze under control, a police spokesman said, rejecting media reports that 150 inmates were injured.
Iquique jail holds 1,700 inmates - almost double its 1,000-prisoner capacity, Lagos said.
Local newspaper El Mercurio said prisoners were protesting in solidarity with a fellow inmate at a nearby jail in Arica who burned himself to death a week ago because he was barred from seeing his brother, who was imprisoned in the same jail.
In an annual address to the nation Monday, Lagos said the incident showed the government needed to speed up plans to double the capacity of Chile's prisons.
"Doubling the capacity of Chile's prison system is the only way we have to tackle this problem," Lagos said. "These 26 dead are a call for the need to act faster."
Monday's deadly protest comes in the wake a string of prison riots and uprisings by thousands of inmates in Brazilian jails in recent months in which dozens have been killed or injured. In 1999, a fire started during a riot at Iquique injured around 30 people.
80 percent of prisoners held at Iquique jail were convicted on drug-related offenses, according to media reports.
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