The remote volcano, 150 miles southwest of Bogota, erupted shortly before midnight Monday and appeared less active at daybreak.
The extent of the eruption was not clear, but even minor eruptions could cause landslides and flooding by melting the snow and ice cap atop the 17,484-foot volcano, and authorities maintained a red alert for settlements near the volcano.
About 3,500 people were left home or were evacuated from villages susceptible to flooding of the Rio Paez, which descends from the volcano, said Carlos Marquez, national director the Red Cross, on radio Caracol.
Hundreds in the village of Belalcazar on the Rio Paez moved to high ground in the middle of the night after warning alarms sounded at the local police station.
Obeimar Munoz, 41, who works at town hall in the settlement of 32,000, said people were returning to their homes Tuesday with volcanic activity tapering off at Nevado del Huila, about 20 miles away.
Cesar Lopez, director of geologic services at the Colombian Institute of Geology and Mining, said that the volcano "is now more calm, but we will have to analyze whether to maintain the red alert."
Eruptions last year at the Nevado del Huila were its first on record since the mid-16th century.
Topped with a crown of ice, the volcano is Colombia's third-highest peak.
The latest eruption was preceded by seismic rumblings starting on April 8.
In 1985, the town of Armero was wiped off the map and 25,000 people were killed when another volcano, the Nevado del Ruiz, exploded and set off a series of mudslides. It was Colombia's worst natural disaster.