We've been recommended this place by many, many Chileans. Some of them calling it the best place to see in the whole country. We haven't been all the way down so I can't confirm this yet! It was indeed a really nice town though. It looked like a european sky resort. There were plenty of small houses resembling chalets and the beautiful Osorno volcano which could be seen from the town's lakefront. The popular activities here include Kayaking, Mountain biking and volcano sightseeing. If you are planning on checking out the volcano I'd recommend getting a bus there as a return ticket will only cost you 5000 chilean pesos (£5). Tours average around 20.000 chilean pesos (£20). Just hop on the bus from the city indicating 'Petruye'.
The excursion to Petruye
The view from the lake front
Whilst we were there we also rented out bikes and cycled 20km towards the volcano. If you're fit and you know it, you can also pedal to the volcano directly in 60km.
The nightlife is pretty good too, especially during high season as every day is a holiday really (except on Mondays supposably). We put our dancing shoes on and went out to Orchadia. The music was good and the crowd was great. If you're feeling lucky after that you can chance it at the casino too.
We stayed at hostel Vermont which is a cosy converted house with a big garden. The staff there were very helpful and friendly. It was an easy place to meet people as well. I highly recommend it.