Hundreds of firefighters struggled to control the fast-moving blaze, which continued into Christmas Day and was made worse by dry weather and strong winds.
Military units and helicopters were deployed to help battle the flames and residents were evacuated to shelters.
The government regional leader of Valparaiso Jorge Martinez Duran said in a news conference on Wednesday that it is believed the fires were started intentionally.
Chilean Interior Minister Gonzalo Blumel said in a post on Twitter that authorities were working to investigate and "there will be no impunity" for those found responsible.
Images show dozens of houses completely destroyed by the flames and residents tried to salvage any belongings.
"Progress has been made in containing the fire, but unfortunately more than 200 homes are already destroyed," Blumel posted on Twitter.
"This isn't just about the numbers -- there are families behind this to whom we have to answer," Chilean Housing Minister Cristian Monckeberg said at a news conference on Wednesday.
Chilean President Sebastian Pinera said on Twitter, "We deeply regret the fire that affects so many families in the hills of Valparaiso and especially on Christmas Eve."
He said a working group had been set up to help the affected families and begin reconstruction.
Located about 70 miles (113 kilometers) northwest of the capital Santiago on Chile's coast, Valparaiso is a popular tourist destination known for its colorful houses, idyllic hills and its historic old town.
The city has been ravaged by wildfires in the past. In 2014, at least 12 people died and 2,000 homes were destroyed when fires tore through the city.
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