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Founded in 1567, Castro is Chile's third-oldest city. Its history has been one of destruction, with three fires and three earthquakes laying waste to the city over four centuries. The most recent disaster was in 1960, when a tidal wave caused by an earthquake on the mainland engulfed the city.

Castro's future as Isla Grande's governmental and commercial center looked promising after the 1598 Mapuche rebellion on the mainland drove the Spaniards to Chiloé, but then Dutch pirates sacked the city in 1600. Many of Castro's residents fled to the safety of more isolated parts of the island. It wasn't until 1982 that the city finally became Chiloé's administrative capital.

Next to its wooden churches, palafitos, shingled houses on stilts in the water along the coast, are the best-known architectural symbol of Chiloé. Avenida Pedro Montt, which becomes a coastal highway as it leads out of town, is the best place to see palafitos in Castro. Many of these ramshackle structures have been transformed into restaurants, boutique hotels, and artisan markets.

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